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WTC: Attacks May Bring Global Recession
12/9/2001 9:25 pm Wed
Wednesday, September 12, 2001
Attacks may bring global recession
New York's World Trade Centre, an icon of global capitalism, crumbled on Tuesday after a
series of attacks, leaving Wall Street in clouds of smoke and rubble and raising the
spectre of a global recession.
Economists said a global economic contraction was almost certain as world stock
markets plunged, the US dollar spiralled lower against the yen and euro, and oil and gold
prices soared after terror attacks on landmarks in New York and Washington.
Analysts speculated the catastrophic events could deal a hammer blow to US confidence
and could send already wary investors fleeing to gold and other assets which benefit in
For years the United States has been seen by investors everywhere as a safe haven - a
place where trillions of dollars could be invested, offering returns typically better than
those available in Europe and elsewhere.
But terrorist attacks that caused both towers of the World Trade Centre to collapse and
left the US Pentagon in flames will have a devastating effect on confidence in the US
economy, which was already teetering on the precipice of recession, economists said.
Markets were shut across the United States, which attracts almost two-thirds of all
global capital flows, in the wake of the attacks and were to remain closed on Wednesday.
This added to the uncertainty about how American markets would react to the tragedy.
''A full-blown global recession is highly likely,' said Sung Won Sohn, chief economist at
Wells Fargo & Co. in Minneapolis.
''Recently, the economy has been on a high wire act, straddling between a recession and
an anaemic growth; [this] damage to confidence will push us into a recession,'' he said.
The US Federal Reserve said it was open and operating and that its discount window
would provide liquidity as necessary.
Federal Reserve Bank of New York President William McDonough, speaking in
Switzerland, said the US central bank would, ''provide that liquidity which is needed''.
Later, the European Central Bank said it also stood ready to provide liquidity to keep
financial markets functioning.
US Treasury Secretary Paul O'Neill sought to reassure markets, saying he has every
confidence in the financial system's ability to weather the latest challenge.
''Our nation's financial markets are strong and resilient,'' Mr O'Neill said in a statement
issued from Japan, where he is travelling and where he will remain until further notice.
''In the face of today's tragedy, the financial system functioned extraordinarily well, and I
have every confidence that it will continue to do so in the days ahead,'' he said.
The closure of markets on Wednesday will mark only the second time the New York Stock
Exchange has shut for two consecutive days, the last being in honour of the end of
World War II in August of 1945.
Economists said there could be untold damage to the US financial system, noting many
key stock market players in the World Trade Centre building were likely killed.
Mr Sohn said he expects a ''stampede'' of sell orders once American stock markets
reopen, and a run on insurance companies, possibly crippling the financial system and
forcing the US Fed to cut interest rates even further.
The Fed has already cut rates seven times this year by total of three full percentage
points to try to reignite sputtering economic growth.
The unprecedented assault on key symbols of US military and financial power came as
growth around the globe slows to a crawl. The US economy is barely growing, Europe's
is slowing rapidly and Japan's actually contracted in the second quarter.
Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York summed up
the feelings of many, saying Tuesday's events meant, ''it won't be business as usual''
''People will begin to invest and spend less as they try to determine what the future will
bring. I can only imagine the stock market is very vulnerable,'' he said.
Before the attacks, the International Monetary Fund had expected global growth of just
2.7 per cent this year, down from almost 5 per cent last year, with the risk of a global
recession rising - the top item on the agenda at the upcoming meeting of leading
industrial nations in Washington later this month.
Economists said the worst-case scenario could be a massive capital flight out of US
assets - something that could crush already weak US stock prices and banish the
American economy into its first recession in more than a decade.
''The major risk is panic in the financial markets,'' said Kathryn Kobe, an economist at
Joel Popkin & Co. in Washington.
''If for some reason the United States is no longer seen as a safe haven for
capital...there could be some very large capital movements.''
Soaring oil prices in 1999 are widely blamed as a key reason the world economy began to
slow late last year.
Tuesday's spike of more than 10 per cent in world crude prices to over US$31 a barrel
was eyed nervously by analysts, who said higher oil prices would also hamper economic
Parts of the US economy, notably the manufacturing sector, are already in recession. But
consumers have remained confident, helping prop up the broader economy although
economists said confidence will be rocked by Tuesday's events.
And the tumble in stock prices - if sustained when the New York stock market eventually
reopens - could further injure confidence and spending, which in the United States has
remained intact in the face of the slowdown.
The US economy, the world's richest, grew only 0.2 per cent in the second quarter and
analysts feared that the attacks could finally turn that paltry growth rate negative.
And given that the attacks appear to have been perpetrated by terrorists, uncertainty
''The fact that US officials cannot rule out further attacks will keep consumers here and abroad in a deeply uncertain state,'' said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio.