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Friday, 14 September, 2001, 10:55 GMT 11:55 UK
O'Neill sees recovery ahead
![]() Financial centres are preparing to rescue the global economy
It is perhaps little surprise that US Treasury Secretary Paul O'Neill is talking up America's economic prospects in the wake of the atrocities in New York and Washington DC.
But are all observers - with some notable exceptions - taking the same line?
Mr O'Neill said on Thursday that the Treasury was, with US central bank the Federal Reserve, working round-the-clock to minimise disruption. "The prospects for a rebound in the US economy remain unchanged," he said. He noted supply disruptions caused by the damage done to the US transport system by the attacks and their aftermath. 'Productive spirit' But he went on: "We have every reason to maintain confidence in the US economy. "No evil, no matter how unspeakable, can destroy America's productive spirit." Among measures to help the US back onto its feet, he announced that the Internal Revenue Service (IRS) is suspending its enforcement of tax law for anyone affected by the tragedy. Alternative views However, not everyone has expressed such optimistic forecasts. In a note to clients, Morgan Stanley's chief economist, Stephen Roach, pointed to the collapse in consumer confidence, fed by growing unemployment, heavy debt and depleted savings, before Tuesday's attacks. The September consumer confidence index from the University of Michigan - released after the attacks but based on data collected before them - dropped to 83.6 from 91.5 in August. Other analysts said that historically movements in consumer confidence data are often well out of proportion with actual behaviour at times of crisis. "The reaction of US businesses and consumers to the tragedy, we believe, will be defiant, rather than abject," Nomura economists wrote. 'Tipping point' But Mr Roach said: "This shock, in conjunction with a very ominous set of fundamentals, is a lethal combination for the American consumer.
"This tragedy could well be the tipping point to the recession of 2001." And a survey of European economists on Thursday found that more than half of gurus have lowered their forecast for European growth this year, typically from 2.0% to 1.8%. Most of the pessimists cited the tragedy in the US as the prime cause behind downgrades. No more short selling But while many in the financial world may privately share Mr Roach's fears, most are keeping them to themselves. Bankers and financiers are striving to make Mr O'Neill's forecast a self-fulfilling one. The massive injection of liquidity in the shape of overnight loans to banks by the Fed and its colleagues in Europe and Japan is widely seen as the precursor to a string of interest rate cuts. Central bankers are standing ready to intervene in the currency markets should it prove necessary.
And finance professionals are pulling together in the wake of the tragic loss of thousands of their colleagues, and in the face of a global economic threat "All the hedge funds are keeping a low profile," one senior UK trader told BBC News Online. In previous times of turmoil, hedge funds - which trade in a type of financial instruments which involve essentially complex bets on market movements - have tended to take advantage of volatility. Their actions were blamed for exacerbating the Asian currency crisis of 1997. "The guys in the hedge funds are pretty ruthless, but most of the banks are just refusing to take their business. "Shorting [selling stocks on the expectation of buying them back at a lower price later] is being seen as positively unpatriotic at the moment." Restrictions According to a number of dealers and fund managers canvassed by BBC News Online, US market authorities are expected to restrict the stock lending without which short selling cannot happen when the US markets reopen on Monday. "Whichever way you cut it, the next three months are a write-off," one trader said. "Christmas will be pretty bleak this year, and there's a lot of pain to come for a range of industries. "But as long as this attack is not part of a broader strategy - and there are those who are very frightened about that, given the level of organisation the terrorists showed - and the US response to this horror avoids the temptation to exact knee-jerk revenge, then the fiscal reflation and interest rate cuts should get us through it. "Otherwise, all bets are off."
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