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Thursday, 27 September, 2001, 06:46 GMT 07:46 UK
Analysis: What now for the world economy?
By BBC business editor Jeff Randall

The dramatic collapse in American consumer confidence, following the World Trade Center attack, increases the likelihood that the US economy will slide into recession.

It's not a nice message, but there's no point in ignoring life's harsh realities.

Those business leaders, including the CBI's director general Digby Jones, who warn against the media "talking us into recession" are living an ostrich-like existence.

The duty of responsible journalists is to tell consumers how they see it, not how they would like it to be.

None of us can pretend that 11 September didn't happen. Clearly the horror on Wall Street has undermined prospects across a wide range of business sectors.

The debate now is not about whether it will have a negative impact, but about how far-reaching the damage will be, and how long the unavoidable downturn will last.

State of denial

America's economy had been dragged along for nearly 18 months by the refusal of US consumers to face up to the fact that they were spending more than they were earning, share prices (especially in the high-tech sector) were in retreat, corporate America was cutting investment, and US unemployment was about to rise.

The devastation wrought by the suicide killers has shaken American consumers from their state of denial.

Not surprisingly, they registered the largest one-month drop in confidence since the 1990-91 Gulf crisis. The upshot will be a sharp fall in US discretionary spending, as families seek to bring their finances into line with a world that suddenly seems much more hostile than one month ago.

In Europe too, consumers have been rattled by the Manhattan atrocity and President Bush's subsequent determination to hunt down the killers.

A survey by research group GfK on behalf of the European Commission shows consumer confidence falling across the eurozone countries.

Revival package

But it's America that is the greatest cause for concern. When the US stops spending, the rest of the world suffers.

It imports more than any other country. In Britain, for example, Americans represent a big chunk of the tourism market, especially in London.

The US is also crucially important to British-based car manufacturers, such as Jaguar and Land Rover, which seem certain to feel the pinch along with other luxury marques.

This economic slowdown is not the creation of fevered press minds; it's real and it's now. That's why the US government is considering a $100bn revival package, including cuts in capital gains taxes and corporate taxes, to stimulate demand.

Likewise, central banks in America, Europe and Britain have trimmed interest rates to head off a credit crunch and lubricate the wheels of commerce.

Their swift action is a tacit admission that a deep recession is possible, if not probable.

Uncertainty discount

Leading US investment bank, Morgan Stanley, told the Financial Times: "Never in their lifetimes have so many Americans feared for their safety in going to work, taking time off, or in procuring their daily needs."

Despite fanciful talk of a "patriotic rally" for American share prices, financial gravity is bearing down on US equities.

The stock markets, where most international indexes are about 30% below their 1999-2000 peaks, are telling us that corporate earnings are likely to be much lower than analysts had expected.

Some sectors, such as airlines, hotels and insurance will be driven deep into loss.

There is also a share-price discount for uncertainty, the biggest element of which is the extent of American military reprisals and what reaction, if any, that will prompt from Osama Bin Laden and his followers.

Until the scale of the Middle East conflict becomes clear, investors will continue to shun the risk of equities for the certainty of cash and government bonds.

Recovery will come. It always does. But a swift return to the go-go days of the late 1990s is inconceivable.

See also:

21 Sep 01 | Business
21 Sep 01 | Business
19 Sep 01 | Business
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