Sun, Sep 23, 2001 page11

• War fears fuel talk of recession

  ON EDGE Pundits say that the recent terrorist attacks on the US, coupled with a growing legion of troubled economies, may push the world into economic decline

  • REUTERS
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  The global economy edged toward the brink of recession on Friday as world financial markets shuddered under the threat of a drawn-out US-led war that could deal a blow to consumer and business confidence.

  Shell-shocked investors dumped stocks and the dollar after US President George W. Bush told Americans to get ready for a a lengthy war against terrorism. Tensions rose further after Afghanistan rejected demands to hand over Saudi-born Osama bin Laden, whom Washington considers the prime suspect in last week's deadly attacks on US economic and military landmarks.

  As the Dow Jones industrial average suffered its worst weekly loss since the Great Depression of the 1930s, economists declared the world's top economy already in recession and cut their growth forecasts. Expectations grew that the Federal Reserve and other central banks would continue to cut interest rates.

  In Belgium, European Union finance officials met for the first time since last week's carnage in New York and near Washington to assess the damage the attacks would inflict on their already-slowing economies and on the rest of the world.

  "The tragic events in the US have increased the uncertainties and downside risks for global growth prospects," they said in a joint statement released after their meeting. But they added: "The EU economy maintains solid fundamentals."

  Speaking on the sidelines of that meeting, Bundesbank president Ernst Welteke said top finance officials from the Group of Seven major industrialized nations would meet in Washington early next month to discuss the situation.

  EU leaders, holding an emergency summit in Brussels, said "the slowdown in the world economy will be more pronounced than foreseen," but added that an unprecedented wave of global rate cuts over the past week should help support financial markets.

  Investors took little notice, however, and stock markets in Europe and the US sold off sharply. The Dow closed down 1.7 percent, and the technology-heavy NASDAQ index shed 3.25 percent amid fears about future corporate earnings.

  Since the hijacked jetliner attacks on the World Trade Center and the Pentagon on Sept. 11, major US stock indexes have shed about 15 percent, wiping out billions of dollars in stock market wealth that could otherwise have helped to boost an economy badly in need of stimulus.

  As stocks have suffered, funds have poured into government bonds, cash and other major currencies, such as the Swiss franc, which are seen as safe havens in the event of a war.

  In a Reuters poll of 25 leading Wall Street brokers, all but one said the economy was now in a recession and most of them did not expect a recovery before the first half of 2002.

  Most economists expect the key fed funds rate, the benchmark for interest rates throughout the US economy, to fall to below 2.25 percent by year-end from 3.0 percent now.

  Credit rating firm Fitch said the global economy was at its weakest in two decades and forecast world gross domestic product growth of just 1.25 percent in 2001.

  Federal Reserve Chairman Alan Greenspan, who on Monday orchestrated an unprecedented campaign for global interest rate cuts, told Congress on Thursday the US economy had stopped in its tracks after last week's attacks even though the foundations for recovery were solid.

  Adding to investors' gloom was the uncertain fate of the airline industry as governments world-wide mulled rescue packages for their air carriers. US leaders agreed on a US$15 billion bailout for their industry, and the European Union said it was ready to help with soaring war-risk insurance premiums.

  Greenspan and US Treasury Secretary Paul O'Neill had warned lawmakers this week not to rush into new stimulus programs and emergency bailouts for affected industries until the economic effect of the attacks became clearer.

  European ministers were considering how much scope they could allow for a rise in budget deficits as they examined the case for state aid for their own airlines.

  Austrian Finance Minister Karl-Heinz Grasser said there should be a "European" solution to the woes of the continent's airlines and warned that governments should not subsidize "chronic sickness" in the industry.

  A gloomy business confidence report compiled by Germany's influential Ifo Institute added to fears that a global recession had been on its way even before the devastating attacks on the US.

  The broad western German business climate reading fell to 89.5 points in August, near a revised five-year low of 89.4 hit in June and versus expectations it would stay flat at July's 89.8 points.

  Still, German Economics Minister Werner Mueller was upbeat about the world's No. 3 economy.

  "I expect we'll have an orderly fourth quarter which will give us a lift going into next year ... I also expect that [this conflict] will lead to a stronger integration of the United States into global trade," he said.

  In the foreign exchange market, the Bank of Japan was once more compelled to sell its own currency to buy dollars.

  It was the third day this week the bank has intervened and dealers estimate it has bought at least US$10 billion. The intervention underlined its determination to restrain the yen, whose strength against the dollar has been a threat to Japanese exporters.
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