Recession fears gripped the global economy on Tuesday as news of a plunge in American consumer confidence in the wake of the deadly attacks on the US two weeks ago raised doubts over a speedy US recovery.
Eager to assure the world that their economies will rebound, US officials and their counterparts from other top industrial economies hit the airwaves to shore up confidence.
Cementing hopes of more deep interest rate cuts from the Federal Reserve, a closely watched survey of US consumers said confidence suffered its sharpest drop in September in almost 11 years, hurt by an eroding labor market and weakening business conditions.
"I think it will keep the Fed worried that consumer spending could falter. It will keep them on track to cut aggressively again," said Jade Zelnik, chief economist at Greenwich Capital Markets.
US Fed Chairman Alan Greenspan, who orchestrated a global round of interest rate cuts last week, was due to address lawmakers in Washington behind closed doors later on Tuesday.
US Commerce Secretary Don Evans said the blow inflicted on the world's top economy by the attacks on New York and the Pentagon may cause a deeper downturn than previously expected -- but one that would be followed by a sharp rebound.
"I think one can make a valid case there," Evans told CNBC television when asked about the odds of a V-shaped downturn, in which growth falls sharply and then recovers quickly.
"We had a set-back two weeks ago. How severe and how deep and exactly what the results are going to be, it is hard to say at this moment," he said.
Evans said a drop in oil prices should aid the recovery by keeping a lid on inflation and giving consumers and businesses extra spending power.
Oil prices had dropped to their lowest level in almost 15 years on Monday amid fears a world recession could cut energy demand, before recovering some on Tuesday.
G7 finance ministers were due to issue a statement on their economies and their efforts to cut off funding for extremist groups later on Tuesday. An Italian government source said the group had agreed there should be no medium-term problems for the US economy.
In Tokyo, Japanese Finance Minister Masajuro Shiokawa said US Treasury Secretary Paul O'Neill had told his counterparts that US economic fundamentals are "not bad," adding that recovery from the shock after the strikes may be quicker than some people had expected.
On Monday, O'Neill said the attacks by aircraft hijackers on Sept. 11 that left thousands dead or missing could delay recovery in the almost US$10 trillion US economy by a "quarter or so."
As Congress and the White House weighed new measures to boost the economy, it was vital not to sow the seeds of future inflationary pressures that might force the Fed to push interest rates up, O'Neill added.
US leaders are mulling billions in extra spending to give the ailing economy a shot in the arm.
Aided by continued monetary easing, most economists expect the additional stimulus to help the economy recover in the first half of next year.
Still, investment bank Morgan Stanley said it was lowering its forecast of global growth for 2001 to 1.8 percent from 2.1 percent and for 2002 to 2.1 percent from 3.4 percent.
The bank's global chief economist, Stephen Roach, said he saw a risk that world growth next year could slow to just 1.25 percent. Because 2.5 percent growth is usually viewed as the global recession threshold, Roach said his forecast depicted a world in deep recession.
"Moreover, if the verdict ultimately falls at the lower end of our new risk range, it would qualify as the worst global recession of the post-World War II era -- both deeper and longer than the contractions of the mid-1970s and early 1980s," Roach said in a note to clients.
Data from France and Italy on Tuesday suggested the European economy may have been in better shape than expected in the second quarter and would therefore have more of a cushion against the attacks' negative impact on business and consumer confidence.
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