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Friday, 21 September, 2001, 09:30 GMT 10:30 UK
US slump could be 'steep but short'
By BBC News Online's James Arnold

First the good news: economists, bankers and other pundits do not believe that last week's US attacks will trigger a global recession.

But the bad news is that they feel the world economy was pretty much headed in that direction anyway.

Over the last few days, the financial community has been attempting to compute the economic costs of the attacks.

While most predict that they will take a hefty bite out of economic output over the next few quarters, many also feel a vigorous clean-up effort has the potential to turn things around quickly.

That won't, however, do much for the global economy, whose underlying troubles have been all-but forgotten amid the rubble.

Indeed, the main economic effect of the attacks will be to multiply the scary number of imponderables already blurring the outlook.

The US will slump...

The first round of post-attack re-forecasts paint a gloomy-looking picture of US economic prospects.

Most had previously expected America's gross domestic product (GDP) to grow slightly - probably by about 1% year on year - towards the end of this year.

But that has now changed.

Financier George Soros
Soros says the state should help
At the gloomiest end of the spectrum is investment bank ABN Amro, which now predicts that US GDP will fall by an annualised 3% in the fourth quarter of this year, and to average out at zero growth in 2002.

The more sanguine Institute of International Finance, a banking-industry association, tips next year's GDP to grow by 1.3%.

Last year, US GDP grew by 4.1%, topping out almost a decade of strong growth.

Aside from the general clear-up costs, the gloomier outlook is predicated on damage to vulnerable industries - notably airlines - and the anticipated impact on once-buoyant consumer spending.

... but not for long

But the same factors could provoke an even more rapid bounce-back, some argue.

In a speech on Wednesday, billionaire financier George Soros said he felt that the coming US slump would be "steeper, deeper, but hopefully shorter" than previously predicted.

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Crisis? What crisis?

The key, Mr Soros said, depends largely on state intervention.

Mark Zandi, chief economist of, a forecasting firm, reckons the stimulus created by billions of dollars of government cash and other aid - as much as $60bn in total, he thinks - will fuel growth.

Mr Zandi has raised his forecast of 2003 GDP growth to 2.7%, from the pre-attack figure of 2.5%, arguing that previous unforeseen disasters have almost invariably produced at least a local spurt in output.

Lack of interest

Even those sceptical about the economic effects of government hand-outs feel the US turnaround could now come sooner.

Traders in Kuala Lumpur
When America suffers, so does the rest of the world
At Merrill Lynch, economist and equity strategist Michael Hartnett says the key to the bounce could come from negative real interest rates - the phenomenon where interest rates are below inflation, making it financially desirable to borrow money.

Previous slumps, especially the crippling recessions of the 1930s and mid-1970s, were all cured by negative real interest rates, Mr Hartnett says.

At present, US interest rates of 3% are only 0.3 percentage points above inflation, and are likely to go lower.

The world watches

So how about the rest of us?

The US accounts for one-fifth of world economic output: its thirst for imports helps support entire industries and regions, especially the technology-intensive countries of Asia.

Unlike in previous slumps throughout history, today's globalised economy means that bad news in one country can spread to others with alarming speed.

The Wall Street Crash
After a crash, a depression is sure to follow
Unfortunately, however, forecasts indicate that while the non-US world may avoid America's slump, it won't benefit from its likely bounce-back, either.

Much of Asia is already effectively in recession; much of Europe - notably Germany - is heading the same way.

And the outlook has suddenly become a lot more uncertain, for a variety of attack-related reasons.

Taking stock

Stock markets are arguably the most potent worry.

An oil expo in Kuwait
Not everyone is dreading high oil prices
The relatively sanguine mood among economists does not seem to be shared by their trading colleagues, who have battered down share prices in the past few days.

Everyone has different ideas about exactly why, but global stock market collapses are invariably followed by global recessions, most famously after the Wall Street Crash of 1929.

Yet fear of recession is one of the main factors driving share prices downwards, possibly indicating that the plunge could be self-perpetuating.

Fuelling fears

Another perennial harbinger of global recessions is the price of oil.

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Oil prices have jumped, and then fallen back, in the days since the attacks, but economists still believe there is a strong possibility of a price spike in the near future.

Any form of military action in the Middle East threatens to disrupt supply, just when the developed world starts to increase consumption as autumn sets in.

Higher oil prices may benefit producing countries, but could cripple industrialised nations such as Germany and Japan.

Unhappy shoppers

Trickiest of all to predict is the impact on consumer spending, the motor that has driven recent economic growth in Europe, the UK and the US.

After the attacks, there was much speculation that consumers might rein in spending out of grief, or a sudden convulsive rejection of materialism.

The psychological factor has almost certainly been overplayed, but is being replaced with something more concrete.

A host of companies seem to be using the US attacks as an excuse to unload thousands of surplus staff, whether or not they have suffered as a direct result.

Precedents suggest that this sort of uncertainty over unemployment is the most powerful factor influencing consumer behaviour.

And the most likely effect of a slowdown in US consumer spending is a collapse of US imports, and therefore of the revenues of companies around the world.

Ironically, therefore, the US might end up simply exporting its economic pain to the rest of the world.

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Unfinished conflict

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See also:

21 Sep 01 | Business
Terrorist toll on the UK economy
20 Sep 01 | Business
Greenspan assesses the damage
20 Sep 01 | Business
US shares tumble again
18 Sep 01 | Business
Japan joins economic support drive
18 Sep 01 | Business
UK rates cut to 1960s levels
17 Sep 01 | Business
Q&A: The Wall Street plunge
17 Sep 01 | Business
Solemn traders return to Wall Street
17 Sep 01 | Business
Economy in the balance
17 Sep 01 | Business
US and ECB cut rates to stem panic
17 Sep 01 | Business
New York gets back to business
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