Concern Grows About Worldwide Economic Fallout From Attack on U.S.

By Peter Nielsen
Reuters

LONDON (Sept. 14) - International policymakers on Friday acknowledged that attacks on the U.S. would deliver a severe blow to the global economy but officials are still searching for a response to restore shattered confidence.

Just as shell-shocked financial markets are struggling to comprehend the enormity of the event, central banks are uncertain about how to respond apart from making absolutely sure a financial crises does not add to the world's woes.

Finance ministers from the Group of Seven leading industrial nations -- who have largely limited their comments to lauding markets for their subdued reaction and restating their confidence in the U.S. economy -- are considering moving their planned meeting later this month to Italy from Washington.

"Central banks are monitoring the situation closely, and are ready to take the necessary action to make sure that liquidity is available and that payments and settlement systems continue to function as smoothly as possible," Andrew Crockett, general manager of the Bank for International Settlements, told Reuters.

"Beyond that it is not easy to say what policy initiatives are appropriate, but they will be considered on an ongoing basis," said Crockett, who also chairs the Financial Stability Forum, a G7-sponsored group of authorities charge of maintaining stability in leading financial centers.

MARKETS SUBDUED

Since Tuesday, trading in Asian and European markets has been subdued as investors try to assess the impact of the attacks on the U.S. economy.

On Friday European shares markets fell on worries ahead of Monday's reopening of U.S. equity trading, but bond prices rose on growing speculation the Federal Reserve would cut interest rates to protect the U.S. economy. Asian stocks also fell, while Japanese shares staged a rebound.

The dollar fell across the board on reports that Afghanistan's Taliban regime had threatened to retaliate against any U.S. attacks on their country.

"The Taliban comment has impacted the dollar," said a European bank analyst. "If the possible revenge actually happens it will have a big negative impact on the global economy."

The dollar was down by almost one percent against the euro, the yen and the Swiss Franc.

OFFICIALS START TO RECOGNIZE GROWTH IMPACT

The long-term prospects for global growth are likely to hinge on the response of the U.S. government and consumers to Tuesday's attacks.

But officials and economists are already recognizing that the attacks will deal a blow to the global economy, which was already getting close to tipping into recession.

"The events in the U.S. have hit the world economy at the worst conceivable moment," Bank Austria Chief Economist Marianne Kager told a news conference in Vienna.

"We expect this to have an additional negative effect on the U.S. economy in the second half, which means hopes of an early recovery are buried."

Speaking in Budapest, Hungary, European Monetary Affairs Commissioner Pedro Solbes said the attacks had reduced the chances of a U.S. economic recovery in the third quarter and made him more pessimistic about European growth. Europe's economy could undershoot his 2001 forecast of two percent.

"The possibility of recovery in the third quarter in the U.S. will be more reduced," Solbes said.

South Africa's central bank governor Tito Mboweni also acknowledged the impact on growth, although much would depend on the response of oil prices.

"The economic impact of this tragedy is currently unknown but that there will be an impact is beyond a reasonable doubt...a lot will depend on how events unfold in the coming days and months," Mboweni said.

South Korea announced a package of emergency steps to help alleviate the pain of falling exports, which had badly hit growth across Asia even before this week.

ECONOMIC ACTIVITY STARTS TO SLOW DOWN

The closure of U.S. air space affected many airlines and U.S. manufacturing companies as the freeze on air freight shipments hit factories relying on just-in-time deliveries.

Honda Motor Co Ltd, Japan's third-largest carmaker, suspended production at its factory in Canada on Thursday due to problems in obtaining parts from the United States.

Global sales of luxury goods are also expected to slump as consumer confidence evaporates and all-important sales to tourists come to a standstill.

France's LVMH, the world's largest luxury good group, on Thursday cut its full year operating profit forecast because of the U.S. attacks.

ECONOMISTS SEE ATTACK SIMILAR TO EARTHQUAKE

Many economists are comparing Tuesday's attacks a natural disaster, such as an earthquake, which typically leads to a short-term slump in growth.

A Reuters survey on Friday showed that 12 out of 22 economists had revised down their forecasts for the euro zone's gross domestic product growth in 2001 since early August.

Nine of the 12 economists gave the attacks on the United States as the reason.

"I think the events in the United States will have a negative impact on private consumption which will lead to lower growth," said Klaus Weiner at AM Generali Finanz in Cologne.

Ratings agency Standard and Poor's expects the U.S. economy to pull through with only a short and moderate recession.

"As severe and devastating as the September 11 terrorist attacks on New York and Washington are, they will not stop the U.S. economy or collapse the U.S. financial markets," S&P said.

Stephen Roach, chief economist of Morgan Stanley, had little doubt the U.S. consumer, laboring under the pressures of depleted savings, debt and unemployment, would be hit.

"This shock, in conjunction with a very ominous set of fundamentals, is a lethal combination for the American consumer," concluded Roach. "This tragedy could well be the tipping point to the recession of 2001."

As a result he saw an even greater chance of a sharp global slowdown and lowered his call for world growth this year to just 1.5 percent from an already anemic 2.0 percent.

CENTRAL BANKS PUMP IN MONEY

Central banks across the world have reacted spontaneously to the disruption in financial markets by pumping in money to the banking system so payment commitments could be honored and the entire financial system did not grind to a halt.

The last thing the world needs right now is a financial crises and central banks are already widely expected to cut interest rates to shore up shattered consumer confidence.

Waves from the attack continue to wash up in Asia where speculation is rife that the Bank of Japan (BOJ) will take further easing steps at its regular policy meeting next week.

BOJ Governor Masaru Hayami conceded the U.S. attacks had had such a large impact on sentiment that they were bound to be a factor when the central bank meets on Tuesday and Wednesday to chart policy. The central bank chief also pledged to make the utmost efforts to tackle Japan's pernicious deflation.

Many also suspect the Federal Reserve may move even sooner with money markets pricing in an imminent cut of at least a quarter-point in the federal funds rate, the U.S. central bank's main short-term rate.

09:12 09-14-01

Copyright 2001 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. All active hyperlinks have been inserted by AOL.