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Thursday, 13 September, 2001, 12:13 GMT 13:13 UK
BBC's economics correspondent, Jenny Scott
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World stock markets are in turmoil, oil prices are rising, investors are buying gold.

Before the attacks on the World Trade Center and the Pentagon, the world was teetering on the brink of recession.

Now there are fears that a global slump could become reality.

Are the stockmarkets doomed? Will there be widespread unemployment? Are pensions safe? Or could the effort to rebuild New York trigger an economic revival?

The BBC's economics correspondent, Jenny Scott and investment banker David Page of Investtec joined us for a live forum.


Transcript:


Newshost:

Faisal Rehman, Lahore, Pakistan asks: Will yesterday's impact on the World Trade Center and the Pentagon in Washington, trigger a spiral of recession worldwide or is that an extreme view?


Jenny Scott:

Anything we say about the economic impacts has to be laced with lots of "ifs" and "buts" because at the end of the day we don't know yet how this is going to pan out. Having said that, most people think that this will definitely increase the chances of a recession in the US and therefore by implication, globally.

I think the impacts are going to be twofold. First of there is a big psychological impact. Consumer spending is the only thing that's been keeping the US alive and stopping it from falling into recession. Typically, when this kind of event happens, people get very, very frightened and when they are frightened they don't tend to spend money. We saw it in 1990 when Iraq invaded Kuwait, that turned out to be a precursor to a US downturn then. Americans tend to hunker down - they tend not to spend their money. So that is one important impact.

The next potential impact is a possible rise in oil prices. If this does escalate into trouble in the Middle East and we see oil supplies disrupted and prices rise then that obviously increases the cost to industry and that has a possible knock-on effect through the economy. So that could topple us over as well. Now on the other side of the balance sheet, if some kind of fighting did break out then presumably government spending would increase on security and on defence and that might act as some kind of counter-balancing stimulus.

You have also got the possibility that if the US Central Bank, the Federal Reserve, perceives a greater risk of recession, it will have another aggressive cut in interest rates. We have already seen a very aggressive move down in interest rates. There was some speculation that there might not be that many more cuts to come. This could quite easily bring another cut forward. It could also trigger cuts co-ordinated around the world from, say, here in Britain, from the Europeans and if that happens that obviously will help to mitigate the effects of a downturn as well. Underlying all of that, the consensus view has to be that this unfortunately comes at a very, very difficult time for the US and global economy and it could be the straw that breaks the camel's back. It could be the thing that tips us into recession.


Newshost:

David Page, the possibility of worldwide recession and, as Jenny was saying, something that people have been talking about long before the events of yesterday.


David Page:

Very much so. The US weakness, as we have just heard, has led to the globe being on the edge of recession. That said, I think what we will probably see - assuming no further ramifications other than what we have seen yesterday - is that we should see the US tipping into technical recession. I think it was very close to being in negative growth in the third quarter and I think probably the fourth quarter will see it still contracting.

Elsewhere there is still a little bit of leeway. Certainly, in the UK, for example, we are now forecasting growth of slowing to below 2% to 1.9% but there is still a long way from that figure towards an actual technical recession.

Similarly for the Eurozone, we think the Eurozone is going to be very weak and it probably will flirt with the zero level of growth or perhaps even contract for a quarter but we probably think it will avoid recession. Globally the situation is going to remain very weak though.


Newshost:

Roy Crabbe, UK How do you think the infrastructure of New York and world financial markets markets will stand up to yesterday's devastation?


Jenny Scott:

It is my understanding that the investment banks, the dealers and the traders in New York have pretty watertight contingency plans and that they have facilities to deal and trade over in New Jersey. So that could kick in if and when markets do open again. Of course in this hi-tech, globalised world, you can trade from more or less anywhere as long as you have a computer and communications to do that. I think there could be a move to move the most important executives and key staff maybe to other financial centres where they could operate from there. So again, it is very difficult to assess how much damage has been done because obviously we are such early stages of the aftermath. But it is my understanding that communications wise they do have contingency plans to cope with this kind of thing.


Newshost:

Rob, Dublin, Ireland who asks: What are the critical factors to watch in the markets over the next few days and weeks, as America begins to trade again and the economic world decides how to limit losses?


David Page:

I think initially what we will have to look for is the equity response. Clearly, the New York Stock Exchange was shut yesterday, it's shut today. We have no real idea when it's going to open but we think perhaps towards the end of this week or the start of next week. So it is going to be the equity losses that are initially going to dictate how far this slowdown is going to accelerate.

Secondly, we will have to see what the Federal Reserve and indeed central banks around the world do. We assume that if there is a large equity fall whenever the US stocks start trading, that we will see quite a large and immediate response from all the central banks and that will mitigate some of the losses. But looking further forward - how are we going to see the US economy progress and therefore the globe - we will be looking really at the consumer. As Jenny said earlier, it is the consumer that's going to dictate how much the slowdown occurs across the US or indeed if the US consumer doesn't dip for whatever reason then we may not see any slowdown at all. So figures to watch on that are going to be the consumer confidence numbers and indeed retail sales and spending figures. Basically, the consumer is going to be the key to this and we need to keep an eye on that.


Newshost:

And the mood right now, in this critical period in the immediate aftermath?


David Page:

Very hard to judge. We've seen obviously shock coming from the United States. We have got no way of judging how that's going to translate into actual consumer expenditure across the United States. The attack itself is unprecedented so we have got no measure to gauge but one would expect that consumer expenditure is going to fall quite dramatically.


Newshost:

Richard Ambery, London, England asks: Is it not the case that in the medium term, the regeneration required following yesterday's terrible destruction could fuel a recovery in the US economy? Moreover, the pay-outs from insurance claims could lead to increased consumer spending. Surely, the real concern is that higher energy costs will be passed to manufacturing, potentially leading to the twin woes of unemployment and inflation.


Jenny Scott:

I think he has got it more or less right. There is speculation that George W. Bush will use this as a reason to increase government spending and that's a classic tool with which to revive an economy. You have got the two tools: you can reduce interest rates or you can increase government spending. So if both happen at the same time, then that will obviously help the chances of recovery.

On the insurance question, again it is a very valid point. There's speculation that this could be the biggest man-made insurance claim in history. But obviously that money has got to come from somewhere, it doesn't just get magicked out of thin air.

On the oil prices, we have heard this morning that OPEC have said that they are happy with the oil supplies at the moment and that has calmed the markets a bit. Oil prices went up massively yesterday - they have fallen back a bit at the moment. OPEC are committed to keeping the price of oil between 22 and 28 dollars a barrel - if it goes outside that range for more than 20 days, they have said they will increase the supply of oil to try and stabilise the price. So if they stick to that and they are able to, if supplies aren't physically cut off, then that should mitigate the effects of a high oil price on the economy. In the early 1970s when we had the price of oil quadrupling, you get this horrible thing called stagflation which is a stagnating economy and inflation which is just the last thing that you want.
Newshost:

On the question of insurance claims, these claims are going to take years and years and years to finalise.


Jenny Scott:

Yes. We have wire reports at the moment saying that insurance companies - it's going to take them days and days just to even put some kind of figure on how much this is going to cost them and yes it will take absolutely years I would image to work its way through the economy and to be sorted out.


Newshost:

Saif, London, UK asks: What in your opinion is going to be the impact on Britain's economy, are we heading towards a recession which is just round the corner now?


David Page:

Beforehand we had looked to the US recovering by the fourth quarter and starting to feed some of the increased global demand through to the UK - that's clearly not going to happen, at least in the short-term. But the UK has got a lot of room for response. The monetary policy committee that controls UK interest rates have still got interest rates at the moment at 5%. They are much higher than they are elsewhere around the globe so we could see more reaction coming from them.

Furthermore, Gordon Brown has already committed some degree of fiscal easing. Public expenditure has increased so there is a boost coming to the economy from that. But the economy - at least the consumer side of the economy - is in fairly good shape. We are still seeing a lot of high street activity. We saw today - at least on the claimant count measure - that unemployment continues to fall in the UK despite three quarters of below trend growth. Now that can't go on forever but there is a firm base there for the UK consumer to keep going. We have also seen UK manufacturing - although it has been hit dramatically both from correction in the ICT sectors and from the global slowdown, starting to perhaps find a base. That may be starting to increase again. As long as the UK consumer remains happy, I think for the short-term the UK will avoid a recession. The real question is how long any slowdown in the US lasts. Even with this we would still see some recovering in the US going into 2002 and that will help pick the UK up as well.


Newshost:

Caroline Howell, Reading, UK Will this American tragedy be the catalyst to eventually burst the housing market bubble in the UK?


Jenny Scott:

Yes the housing market is a really difficult one to get a handle on at the moment because some people might even say there isn't particularly a bubble because on average houses still remain affordable even though it probably doesn't feel like it to a lot of people. So what we could see is the rate of house price growth slowing down a bit. But alternatively if we do see these interest rates coming down in co-ordinated action around the world then obviously that could lead to lower mortgages, so it could make it even more affordable to pay your monthly mortgage.

So there is a couple of things at work there and I think it's the same advice as it always is - which is - if you are not over-extending yourself, if you can afford to pay your mortgage relatively comfortably, then there is no reason why you shouldn't go ahead and buy your house. But it is when you start to get to the 1980s levels of borrowing five-times salary that you could be in trouble. At the end of the day, if you have job security and you can afford your monthly mortgage payments then things should be ok.


Newshost:

Is the housing market something of a safe haven for investors at a time of great uncertainty like this in the same way that people go towards gold in times of unpredictability?


Jenny Scott:

The trouble with the housing market is that it's a lot more subject to economic conditions than something like gold is. If people do start losing their jobs on a wide scale then the housing market will suffer because people won't be able to pay their mortgages. Bricks and mortar at the moment sounds like a bit of a safer bet than something like equities because they are all over the place. But it hasn't got the safe haven status that gold would have.


Newshost:

Matthew Duckworth, Reading, UK asks: I think the best way to judge how you feel on the subject of recession is simply to put the following question to you: Would you be prepared to buy a house tomorrow?


Jenny Scott:

I would but with some caveats. I would if I had job security and I would if I wasn't over-extending myself. Thirdly, I would if I was planning to stay in there for a long time. Not if you are aiming to make a quick buck but if you are nesting not investing and you think you can afford it then I would feel comfortable with it. But having said that, the housing market is such a strange beast, particularly in the UK where so many of us own our houses as opposed to somewhere like Europe where many more people rent. It is a very unpredictable market and we just don't know how these events are going to pan out yet. We don't know how far reaching the economic consequences are. I would just say, proceed with a lot of caution.


Newshost:

David, how much of a barometer do you feel the housing market is at this time?


David Page:

I think it works very well as a barometer purely on the basis that it judges well as an act of consumer confidence. It is the biggest purchase that a consumer is likely to make. They need to have job security, they need to have personal funds and the interest rate environment needs to be correct for somebody to go ahead and make that purchase and on that basis you need three ticks. If the economy has those three ticks for the majority of the people in the economy it is probably doing pretty well. So as a barometer it works quite well. Having said that, clearly it is also regional and that is something that we are seeing in the housing market data at the moment.


Newshost:

Santosh C N, Chennai, India asks: What will be the effect of this on the economy as a whole and particularly on the technology fields? Do you have any statistics on how many software firms used to operate in the World Trade Center in New York?


Jenny Scott:

I am afraid I am not armed with the statistics on that. I think one of the benefits - if there can be any benefits for it - is that we will obviously see a massive reinvestment in IT by those firms who clearly aren't there any more so that is going to give some boost. But generally speaking, the technological sector is one that's needed to correct its inventories. We have gone through a process over a period of a year or so now where they have been running down stocks and I would image that that's coming to the end of it. One of the joys of technological stocks is that they are written down quite quickly i.e. firms need to replace them quite quickly anyway. We have had a year of adjustment where we have not seen a lot of investment into the technological field - we will possibly see a little bit more now. I am not sure if this has too specific an impact on the technological sector itself. I think the ICT story runs almost in parallel to this.


Newshost:

Jenny, you were talking earlier about the communications and the infrastructure in the World Trade Center. Can you shed any more light on this question about software firms?


Jenny Scott:

I am afraid I don't have the specific statistics to hand but I do know that there were a large number of different companies from all over the globe in the World Trade Center - it wasn't just American firms.


Newshost:

Claire Smedley, Nottingham, England How can we regain the much-needed economic and social stability within the chaotic aftermath of such devastation?


Jenny Scott:

I think in one sense by keeping our heads. As David said earlier, consumer spending is incredibly important to the British economy, particularly at this time. It is the thing that's been keeping us all afloat. So we have got to be very careful not to talk ourselves into a recession here. If we get too worried about things and we don't spend our money that means that firms won't be able to make money which means stock markets will fall even more and the whole thing will just spiral down. I think we have to be careful not to talk ourselves into recession. On the other hand, we have got this government spending billions and billions of pounds coming on stream at a very opportune moment so that will help to counter-balance it - government spending does account for a large part of the economy as well. So between the two of them, if we can manage to do that, then I think it will help things a lot.


Newshost:

David, I guess stability is what both bankers and politicians and the George Bush administration will be wanting more than anything else right now.


David Page:

Very much so and indeed that's what the Federal Reserve were trying to guide the US towards. The US has gone through a very heady period of growth. It was going through a period of catch-up, if you like, where headroom was being made again. This has clearly shocked the US economy and consequently the global economy. But I think fundamentally the Federal Reserve and the co-ordinated action of other central banks will help to guide individual economies back, as Jenny said, as long as the consumer keeps its head and keeps spending. That's going to guide us in the short-term - in the longer term, I think we look to restructuring in the US - it gets itself back on its feet and starts to rebuild New York and its own economy and that should lead at least to economic stability.

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