Attacks may trigger global recession: Analysts

New York's World Trade Center, 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 specter of a global recession. Economists said a global

economic contraction was almost assured as world stock markets plunged, the US

dollar spiraled 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 uncertain times. However, President Bush said in a

televised address to the nation that the world's richest economy would carry on

despite what he called "evil, despicable acts of terror." "Our

financial institutions remain strong and the American economy will be open for

business as well," Bush said.

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 Center to collapse and left

the Pentagon in flames could 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

anemic growth; (this) damage to confidence will push us into a recession,"

he said.

Help being readied



The world's major central banks issued statements saying they stood ready to
act to counter any potential market turmoil. The US Federal Reserve said it was

open and operating and that its discount window would provide liquidity as

necessary, a tacit admission that it stands ready in crisis mode.

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. Japan's Ministry of

Finance said it had provided extra liquidity after the US attacks and that it

stands ready to take appropriate foreign exchange actions as needed.

The Nikkei stock index in Tokyo opened Wednesday's trading sharply lower,

plumbing levels not seen in 17 years and losing more than 6 percent. U.S.

Treasury Secretary Paul O'Neill, who was traveling in Tokyo, 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," O'Neill said in a statement issued from Japan, 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 honor of the end of World War Two in August of 1945.

Economists said there could be untold damage to the U.S. financial system,

noting many key stock market players in the World Trade Center buildings were

likely killed. 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 a total of three

full percentage points to try to reignite sputtering economic growth.

The beginning of global recession?



The unprecedented assault on key symbols of U.S. military and financial
might came as growth around the globe slows to a crawl. The U.S. 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" anymore. "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 percent this year, down from almost 5 percent 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."

Oil prices, regarded as one of the culprits behind the slowdown that began

late last year, spiked more than 10 per cent on Tuesday before closing up nearly

6 per cent on the day at a over $29 a barrel, a shift eyed nervously by

analysts, who said higher oil prices would also hamper economic growth.

Parts of the U.S. economy, notably the manufacturing sector, are already in

recession. But consumers have remained confident, helping prop up the broader

economy. However, economists said that faith 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.

(C) Reuters Limited 2001.