BBC NEWS Americas Africa Europe Middle East South Asia Asia Pacific Arabic Spanish Russian Chinese Welsh

 You are in: Business
Front Page 
UK Politics 
Market Data 
Your Money 
Business Basics 
Talking Point 
In Depth 

Commonwealth Games 2002

BBC Sport

BBC Weather

Thursday, 13 September, 2001, 13:35 GMT 14:35 UK
Has economic crisis been avoided?
Tails of grounded airlines in the US
The longer airlines are grounded, the longer trade is disrupted
If the reaction of markets so far is anything to go by, the world has avoided the worst case scenario of a global economic meltdown after the terrorist attacks on the US.

With policy makers and central banks pledging to help ward off a recession, shares have recovered lost ground, and "safe haven" assets such as gold and bonds have given up some of the gains made immediately after Tuesday's events.

Acts of evil will not cripple the markets. Our financial system is, and remains, strong. The American economy is open for business

Ken Dam
US Deputy Treasury Secretary
But the broad feeling in the financial community might best summed up by US Federal Reserve Bank of Dallas President Robert McTeer when he said it was too soon to know.

"It will not depend as much on what happened, as how we react," he said.

Hours after images of the attack appeared around the world, observers feared that subsequent economic turmoil would push some countries into recession.

But statements from key financial decision-makers sought to reassure markets that the worst attack on American soil since Pearl Harbor would not cause a global slump.

"Acts of evil will not cripple the markets," said US Deputy Treasury Secretary Ken Dam on Wednesday at the Treasury's first major briefing since the disaster.

"Our financial system is, and remains, strong. The American economy is open for business."

Broader impact

Yet even small implications of the attacks could, nonetheless, together represent an economic burden.

Grounded FedEx planes
Most planes are still grounded in the US

When markets are closed and shares are not traded, investment banks are unable to earn commissions.

Meanwhile consumers, concerned over the uncertain outlook, postpone spending decisions, hitting the whole retail and manufacturing chain.

With most US flights still grounded on Thursday, airlines, hotels, restaurants, entertainment venues and stores were already feeling the pinch.

Also businesses cannot deliver goods. Nokia, the world's largest mobile phone maker, said on Thursday it was too early to predict the impact of halted flights to and from the US on deliveries to customers.

Honda Motor closed its plant in Canada due to a lack of parts from the US, and said it does not yet know when operations restart.

Such trials are among the myriad of problems which can, together, cause serious economic difficulties.

Short-term reaction

Historically, market reaction to disasters has been short-lived.

Investment banking giant JP Morgan called the attack a significant though temporary blow but forecast that third quarter growth in the US would be negative.

"There will not be lasting disruptions to the US economy or its financial system... a return to normalcy should be evident by next week," the bank said.

But much of New York's financial infrastructure is still buried under piles of rubble.

US stock markets are not due to open before Friday at the earliest, after their longest period of closure since World War I.

"We expect the global economic and overall market mood over the next few days to be broadly one of wait and see," said John Llewellyn, Lehman Brothers' global chief economist.

The big picture

The long-term outlook depends on the US political and military response.

ECB President Wim Duisenberg
No rate cut from the ECB

American retaliation against an oil producing state could have serious ramifications.

For now the price of oil has come down after reassuring statements from Organisation of Petroleum Exporting Countries (OPEC) but such an attack could compound what is still a very delicate situation.

On a practical front, central banks have kept the financial markets awash with liquidity, in essence offering money at cheap rates similar to a rate cut.

The US Fed, the Bank of Japan (BOJ) and the European Central Bank (ECB) injected more than $120bn into the global markets on Wednesday.

The ECB did not cut rates at its policy meeting on Thursday after President Wim Duisenberg said it would be counterproductive.

Greenspan's return

The US Fed's next meeting is on 2 October and a half-point cut is expected after seven aggressive rate cuts this year.

US Fed Chairman Alan Greenspan with President Bush
Rate cut to support the economy is expected from Greenspan
Chairman Alan Greenspan returned to Washington from a meeting in Switzerland on Wednesday, sparking rumours of an emergency cut.

"A rate cut was virtually assured with the (US employment) data last week, and (Tuesday's) events really increase the probability that they come in near term with a larger than a (quarter percentage point) cut," said Kim Rupert, senior economist at Standard & Poor's.

Co-ordinate action

The Group of Seven (G7) - US, Japan, Canada, Britain, Germany, Italy and France - finance ministers and central bankers issued a statement on Wednesday saying they were "committed to ensuring this tragedy will not be compounded by disruption to the global economy" and they "stand ready to take further action as necessary".

"The markets have reacted sensibly. There is no reason to build up a crisis scenario," said German Finance Minister Hans Eichel.

The G7 finance ministers meeting scheduled for 28 September is expected to take place though the annual meetings of the World Bank and International Monetary Fund (IMF) could be cancelled.

But the IMF made an upbeat declaration, saying it forecast only a limited impact on the global economy and that it was ready to help countries that may need it.

See also:

13 Sep 01 | Business
Only one tower insured, report says
12 Sep 01 | Business
Will US consumer confidence fade?
12 Sep 01 | Business
Q&A: The global economic impact
Internet links:

The BBC is not responsible for the content of external internet sites

Links to more Business stories are at the foot of the page.

E-mail this story to a friend

Links to more Business stories