Forecasters are lowering their expectations for global economic growth in the wake of September's attacks in the United States. While it's too early to predict precisely what impact the attacks will have, experts say the strikes on the World Trade Center and the Pentagon dealt a blow to an already weakening global economy. The U.S. central bank has taken aggressive steps to mitigate the fallout by cutting interest rates, but some question how effective that strategy will be in reversing the sharp decline in consumer confidence.
Prague, 4 October 2001 (RFE/RL) -- Forecasters are lowering their estimates of global economic growth following the 11 September terrorist attacks in the United States.
While they concede it's too early to gauge with any precision the impact of the attacks, they say the effect will be to further slow an already slowing world economy.
This week, the Paris-based Organization for Economic Cooperation and Development, the OECD -- which regularly publishes forecasts of global economic growth -- warned that the economic impact of the September attacks will be felt around the world until at least the middle of 2002 as consumers and businesses reduce spending.
The OECD did not quantify the impact of the attacks but warned that the U.S. economy -- the world's biggest -- is likely to contract in the second half of the year and that growth would be very low, or zero, in Europe. Earlier, the OECD forecast that the economies of its 30 member states -- which include most of the world's largest -- would grow by a collective 2 percent this year and 2.8 percent next year, following an expansion of around 4 percent last year.
Patrick Lenain, a senior economist at the OECD, says the attacks affect the global economy in two ways.
"First is the direct impact of the loss of activity. We all know about the air travel being cut back substantially. Also, [there were] some cuts and losses in the financial industry when Wall Street [New York's financial district] was closed. And there were also other obstructions, like queues [lines] at the border between Canada and the U.S."
Lenain says these direct losses appear spectacular but will not have a significant long-term impact on the world economy. More important, he says, will be the indirect effect, through depressed business and consumer confidence.
"People are concerned first about their jobs, about losing their jobs. So they may decide to save a bit more and spend a bit less just to put some money on the side in case they lose their jobs. They are also concerned that the stock market may decline -- and it has already declined quite a bit -- they may fear that more declines in the stock market [would mean that they would] lose some of their assets."
The amount consumers and businesses spend is the motor that drives any economy, but measuring consumer confidence is more psychology than hard science. The premise is that consumers and businesses will buy more if they feel secure and optimistic about their futures. In turn, they buy less during uncertain times.
The University of Michigan in the United States conducts regular surveys of consumer confidence. In a recently released report, the university says consumer spending held up well in the first week after the 11 September attacks but faltered badly in the final two weeks of the month.
The university says in a statement that "the initial reaction of consumers was to reassert their confidence, but [consumers] quickly concluded that the repercussions of the terrorist attack would significantly harm an already weakened economy."
Since the attacks, the U.S. government has acted aggressively to try to restore consumer and business confidence. Immediately after the attacks, the government announced a $40 billion recovery and antiterrorism package and, later, a bailout plan for U.S. airlines, which were particularly hard hit by the attacks.
And in New York, President George W. Bush recently said he would ask the U.S. Congress to approve another tax-cut plan to avert a recession caused in part by September's terrorist attacks.
Treasury Secretary Paul O'Neill said the tax cut would amount to at least $60 billion. That would be on top of a recent tax rebate to individuals totaling $40 billion.
The U.S. central bank, the Federal Reserve, also has moved quickly to cut interest rates to shore up the economy. The bank has taken half a percentage point off its benchmark "federal funds" rate twice since the 11 September attacks, bringing the rate to 2.5 percent -- below the inflation rate. The U.S. hasn't seen lending rates this low since the early 1960s.
Rate reductions traditionally help spark economic growth by making it easier for companies and individuals to borrow money, but economists are skeptical that these reductions will do much good. The Federal Reserve had already lowered interest rates seven times this year before the terrorist attacks in an effort to revive the flagging U.S. economy -- without any sign the cuts were working.
John Higgins, a senior economist at Nomura Securities in London, says that's because the U.S. economic slowdown -- under way since the end of last year -- is not typical. He says the phenomenal growth of the U.S. economy in the last half of the 1990s was powered by private companies making massive capital investments. This, he says, led to a build-up in inventories and a sudden stop in spending.
"If you've got a large excess-capacity overhang, a period in which there is excess investment and a build-up of capital stock, then loosening monetary policy doesn't necessarily resolve that."
Higgins points to Japan, where central bankers have lowered rates to near zero, yet the economy remains mired at near-recession growth levels.
Higgins says, however, that if in fact the U.S. is already in recession -- as many economists believe -- there is a historical precedent to suggest that cutting rates to below the level of inflation will work.
"If you look at the periods of sub-trend -- or I would say, recession -- that have characterized the U.S. since the second world war, every single time that we've been in a recession, the Fed has needed to [lower the federal funds rate to zero or below the inflation rate] in order to turn the economy around."
Nomura agrees with the OECD's assessment that the economic impact will not be limited to the U.S. but will be felt around the world. Nomura and other investment banks are now in the process of telling their clients that the outlook for the global economy this year and next year will not be as rosy as previous assessments had indicated.
Higgins says Nomura's outlook for European growth, following the U.S., will be significantly reduced to just above zero for the rest of this year and early 2002.
He says the European Central Bank, or ECB, like the Federal Reserve, will likely cut interest rates again when it meets on 11 October. The ECB has been more reluctant than the Fed to use lending rates to stimulate the economy because of fears that too much money injected into the system will spark inflation.
Higgins says that argument no longer holds up.
"The ECB has woken up to the fact that Europe is no longer an oasis and clearly has been adversely impacted both directly by trade and indirectly through asset markets and business confidence by what has been happening globally."
Analysts say much will be determined by the course of events, that is, how the U.S. responds to the attacks and how long that response lasts. As Higgins puts it:
"The $64,000 question is, 'To what extent will this military crisis escalate?' And to what extent will that negatively impact consumer confidence over a protracted period of time?"
He concedes that is the great "imponderable." But he adds a more positive note that whatever does happen, employment rates on both sides of the Atlantic are likely to stay relatively high. Therefore, he says, consumer spending cannot fall too far. This means economic fortunes could begin reviving as soon as the second half of 2002.