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Wednesday, 12 September, 2001, 11:25 GMT 12:25 UK
Q&A: The global economic impact

Wall Street is paralysed, global stock markets have swung wildly, the prices of oil and gold rose sharply. BBC News Online investigates the likely economic fallout of the attacks on the World Trade Center in New York and the Pentagon.

Are stock markets headed for a meltdown?

There is no precedent for what has happened in the United States, and therefore the impact on stock markets is incredibly difficult to gauge.

It all hinges on whether investors expect the world economy to go into recession or whether they are confident that a global crash can be avoided.

Share prices, after all, are a reflection of a company's value and its prospect of future earnings.

To avoid an economic crunch, the world's central banks have promised to provide cheap credit.

This move to improve "liquidity", as the experts call it, helped the world economy survive the aftermath of the "Black Monday" stock market crash in 1987.

After an initial sell-off in Europe and Asia, stock markets appear to have stabilised.

There will be another jolt once the US markets open, but if investors don't panic, the losses could be limited to individual industry sectors, such as travel and tourism, which look likely to be worst affected in the longer term by the attacks.

But if the central bankers' gamble fails, and investors convince themselves that a recession is imminent, a global slump may be unavoidable.

How important is the World Trade Center to the global economy?

Despite its name, the World Trade Center has no official global function in international trade.

It an office building - albeit an extremely important one - rather than any sort of agency or trading hub.

Its economic significance lies in the huge number of financial institutions that have offices in the building, and in the surrounding commercial district of Manhattan.

I did my share dealings through a bank based in the World Trade Center. Is my investment safe?

Your investment is safe.

The attack happened outside trading hours. And the records of all share deals will be backed up electronically outside the World Trade Center.

And what about the oil market? Will petrol prices rise?

The price of crude oil surged in the hours after the attack.

The International Energy Agency has also warned that fuel stocks are currently running very low in Western countries, which could push up prices further.

Some countries are clearly worried, with Thailand, Taiwan and South Korea checking their supplies and pondering oil export bans.

But the price of oil is already coming down sharply, after the Organisation of Petroleum Exporting Countries (Opec) said it would ensure a steady oil supply.

Oil market analysts at Deutsche Bank Alex Brown confirm that Opec has enough spare capacity to stabilise the markets.

In the medium term, oil and petrol prices should not be affected by the attacks.

However, if the situation escalates into a conflict involving Middle East countries, the oil markets would certainly be in deep trouble.

So can we avoid a recession?

Wim Duisenberg, the president of the European Central Bank, has already warned, that the attacks could have "long-term economic consequences".

But there are two schools of thought as to what might actually happen.

Worst case scenario

With air travel severely restricted, and the government burdened with the costs of rebuilding New York and the Pentagon, the US economy could slowly grind to a halt.

US consumers, fearing the worst, stop spending, thus accelerating the downward spiral. An already weakened US economy goes into recession, dragging down the rest of the Western world.

Developing countries, meanwhile, would be starved of investment and would have not markets to sell their products.

The optimists view

But some people believe the attack could actually trigger a global economic turnaround.

Central banks have hinted that they will make credit cheaper. Analysts expect further sharp interest rate cuts both in America and Europe.

While companies and consumers will find it cheaper to invest and spend, the US government will go on a massive spending programme, both to rebuild and to improve its defences.

Taken together, this massive demand should boost the economies in America and Europe, and could set them back on track for global recovery.

What about the dollar?

That's another big uncertainty. There has been a large move out of the dollar, into the euro, yen and Swiss Franc.

For the first time, the euro has acted as a safe haven.

Tuesday's devastating attacks on US interests might have caused a fundamental realignment of the world's currency markets.

But if the optimists are right and the rebuilding effort does result in a US-led recovery, then the dollar should soon return to its old strength.

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