The world economy stands on the brink of a US-led slide into recession after the terror attack flattened the World Trade Center, and the decisive factor may be Wall Street's reaction on Monday, September 17, experts say.
There is no comparable event in US history, and no one can predict how the economy, which grew just 0.2 percent in the second quarter, will react, analysts cautioned. In past upheavals such as the Gulf War, however, consumer confidence took a hit.
"Two events may determine the speed of consumer recovery," said Joel Naroff, chief economist of Naroff Economic Advisors. "The first is the stock market. Will it be solid or will it wilt?" he asked.
"If it quickly stabilizes and possibly even advances, then households will not feel that their financial world is indeed crashing in around them," Naroff said. "A collapse would be a catastrophe that could push us under. We will know the answer to that question early next week."
Military action would also be critical, Naroff said. "There will some type of action. How quickly that operation occurs and how successful it is in terms of satisfying the desire for revenge that exists will help determine the willingness of people to have a happy holiday season."
As fear over Wall Street's reaction builds, the US authorities have invoked emergency powers to relax trading rules, making it easier for securities giants to buy up their own shares and shore up the market in the case of a free fall.
But Europe appears unconvinced about forecasts for a so-called patriotic rally Monday. London shares slid more than six percent over the past week to close at its lowest level in nearly three years, and Tokyo's market was down 4.8 percent.
"We are going to attempt to stay away from providing misinformation or pretending we know how this will all play out," First Union analysts said in a report. But they said the consumer response was likely to be similar to that following Iraq's invasion of Kuwait in August 1990.
"Back then, we saw department sales plummet in the wake of higher energy prices and the uncertainty of any impending conflict. Sales plummeted further when the bombing began as people became glued to their TV sets," the report said. "Finally, sales bounced back once conflict ended but then subsided because the economy was still weak."
But the disaster has already mobilized US and worldwide economic might into a concerted effort to rescue the global economy. Finance ministers and central bank governors of the Group of Seven (G7) leading industrialized nations pledged last week to avert disruption to the global economy.
The most obvious industrial victim of the hijack attack were US airlines, which suffered an unprecedented two-day shutdown of US airspace, with frightened passengers deserting the skies and stringent new security rules forcing them to cut long-term schedules by 10-20 percent.
But the US administration agreed to meet early next week to examine financial aid for the aviation industry, already suffering from high fuel prices and the sluggish economy. The House of Representatives is considering a proposed $15-billion bailout of the aviation industry, including $2.5 billion in grants and $12.5 billion in loans.
The US Senate also approved Friday a $40-billion supplemental aid package to tend to the crisis, raising the prospect of an extra boost to the economy. Meanwhile, the Federal Reserve is widely expected to cut interest rates further on October 2, after slashing the federal funds rate by three percentage points to 3.50 percent this year. And about $40 billion in tax rebates are landing in people's mailboxes.
Moody's Investors Service said Friday the risk of global recession arising out of the terrorist attacks was limited, and the central banks were playing a vital role to bolster confidence in the financial system.
The destruction of the World Trade Center knocked out the financial district, forcing Wall Street into a four-day closure, the longest since World War I. It also halted many financial institutions' foreign exchange businesses, leading the Federal Reserve to pump in $118 billion into the financial system from Wednesday to Friday to supply banks with sufficient dollars.
Further swap agreements with British, Canadian and European central banks provided a combined $90 billion to ensure foreign commercial banks had sufficient supplies of US currency during the disruption. ― (AFP, Washington)
by David Williams
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
