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Wednesday, 26 September, 2001, 13:37 GMT 14:37 UK
US economy in freefall
The US economy, which makes up one quarter of world economic output, is slowing sharply, and bringing down growth throughout the rest of the world.

And the terrorist attacks are likely to make the problem worse, although the International Monetary Fund (IMF) says it is too early to assess the full economic consequences.

Kenneth Rogoff, the IMF's chief economist, said that a US recession was now more likely.

"Whether it will be a bit above zero or below zero... a trough in US growth is very likely," Mr Rogoff said.

However, he added that "I think there is every cause for a v-shaped rebound next year."

Later, he withdrew his initial statement that a US recession was a "done deal," saying no one could tell if growth would turn negative.

Confidence has been further shaken by the terrorist attack, exacerbating risks that the pace of recovery may be slowed

IMF World Economic Outlook
The IMF's world economic forecast was due to be published at the Fund's annual meeting, but that meeting was cancelled amid security concerns in Washington.

However, the new forecast makes it clear that the US is at the centre of the world economic slowdown.

It says it is too early to quantify the indirect of the terrorist attacks, but it says that it is likely to delay any recovery for some time.

However, the IMF said that the prompt response of the US authorities may have prevented a deeper downturn, with further tax cuts and interest rate cuts in the pipeline.

Blow to confidence

The IMF was already projecting that the US economy would slow to a growth rate of 1.3% this year, compared to 4.1% in 2000, before recovering to 2.2% in 2002.

The IMF makes it clear that the initial slowdown in the US was due to a sharp drop in business investment, with a collapse of software and computer hardware purchases and a rundown of business inventories.

It points out that consumer spending had remained "relatively robust" while construction had actually expanded.

It is this element that is now threatened, with confidence and consumer spending at risk.

And, the IMF warns, the stock market falls could hurt the willingness of consumers to spend.

But the IMF says that the measures already taken, including the extra $40bn in economic aid and the 0.5% rate cut last week, "should support activity in the period ahead, allowing demand to recover modestly by the end of the year."

However, "confidence has been further shaken by the terrorist attack, exacerbating risks that the pace of recovery may be slowed."

Downside risks

The IMF warns that there are other dangers to the US economy, including a huge current account deficit and a large overhang of consumer debt.

The hope is that the slowdown will be gradual and orderly, allowing the currency and the stock market to adjust gradually downwards.

The global imbalances in the US, including the over-valued dollar, have affected the rest of the world, and a rapid collapse of its value could hurt Japanese exporters and fuel inflation in Europe.

But the biggest effect of the US slowdown is likely to be on its neighbours in North America, and its Asian exporters.

Growth rates in newly industrialising Asian countries are projected to slow from 8.2% in 2000 to 1.0% in 2001, while Latin America is likely to see its growth rate cut in half, from 4.2% to 1.7%.

These are dramatic changes compared to IMF expectations just six months ago, and show just how inter-linked the global economy has become.

See also:

25 Sep 01 | Business
Business gurus warn of US recession
25 Sep 01 | Business
Why consumer confidence matters
21 Sep 01 | Business
US slump could be 'steep but short'
20 Sep 01 | Business
Greenspan assesses the damage
17 Sep 01 | Business
US and ECB cut rates to stem panic
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