European economic growth, already slowing as exports dwindle and stocks slide, may grind to a halt in the wake of yesterday's terrorist attacks on the US, analysts said.
European companies sell 14 percent of their exports to the US. Disruptions to business and the shaken confidence of consumers in the US may mean the economy there will shrink in the third quarter for the first time in more than eight years, increasing the possibility of the first recession in a decade.
"The timing could hardly be worse given that fears of US and global recession were already rife," said Mark Cliffe, global head of economics and strategy at ING Barings in London.
Interest rate futures contracts in Europe rallied as investors bet central banks will lower benchmark lending rates to counter the threat of recession. The rate on the three-month euro contract for September settlement dropped 13 basis points to 4.08 percent in two days, below today's three-month money market rate of 4.24 percent.
Central banks moved to reassure markets. ECB President Wim Duisenberg told the European Parliament: "The ECB and the national central banks are standing ready to support the normal functioning" of financial markets if the need arises.
The Bank of Japan added an extra ?2 trillion (US$16.8 billion) to the money market. Other Asian central banks pledged to defend their currencies and provide cash to keep markets functioning. The Swedish central bank said it had "increased its emergency preparedness."
In the US, Federal Reserve Governor Edward Gramlich said yesterday that "If credit is needed to make transactions go, the Fed will provide it."
Sales may decline at such airlines as British Airways Plc and Air France SA. The attacks raised expectations that executives will cancel travel arrangements and limit air travel for some time to come. Conferences in European cities from Barcelona to Stockholm were scrapped.
Shares in British Airways fell 21 percent yesterday. European stocks fell on concern that consumer confidence and economic growth will suffer as a result of the attacks. The Dow Jones Europe Stoxx 50 Index dropped 1 percent, or 30.86 points, to 3147.37 after shedding 6 percent of its value yesterday.
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