Accessibility links

Breaking News

Terrorist Attacks Fuel Fears of Recession - 2001-09-13

Analysts say an already weakened global economy could slip into recession in the aftermath of the worst terrorist attacks in U.S. history - but some experts insist that such worries are premature.

On the streets of Tokyo, people say they fear that Japan's already deteriorating economy could be further damaged by the terrorist attacks in the United States. One man says that the attacks have shattered his hopes that the world's second largest economy will avert a full blown recession. "The Japanese economy will obviously be affected," he said. "However, it is simply one of the many economies in the world, which could suffer as a result of these incidents."

While many international economists say that such predictions are premature, businesses and markets around the world are braced for a further downturn.

Analyst Ken Davies, from the Economist Intelligence Unit, says that many countries in Asia and elsewhere count on the United States as their largest export market. He says the United States is undoubtedly the major global engine for growth. "Asia has already been suffering this year from lower demand for exports," said Ken Davis. "It has been suffering more than anywhere else because it is so successful at selling high tech equipment to the United States. So it will make things worse."

While Mr. Davies warns against jumping to conclusions about the fate of the world economy over the coming months, he acknowledges that U.S. consumer confidence is key. "The only problem is the world economy is very much dependent on growth in the U.S. which has been very poor so far," he said. "The only thing holding the economy up is consumer confidence. All it needs it one cataclysmic event to dent that confidence and growth would be even worse. Well, this is a cataclysmic event."

On Thursday the Asian Development Bank said the terrorist attacks will at the very least have short-term implications. It, too, forecasts that U.S. consumers are now likely to curtail spending further, which, it says, will inevitably affect companies the world over.

The Manila-based international bank said it plans to lower growth forecasts for Asian countries outside of Japan in a report to be issued next month. For the longer term, its predictions are more optimistic. It says that Asia's traditionally high savings rates will ultimately help speed its recovery by shoring up liquidity.

Ever since the terrorist attacks on Tuesday, Asian central banks have stood ready to pump money into the financial system to avert a collapse. Japan injected some $16 billion into its markets Wednesday.

South Korean leaders also appear concerned and committed to action. The country's Finance Minister Jin Nyum is urging market participants not to panic and has promised to make emergency funds available to shore up the economy.

In the investment world, experts point to immediate problems. Analyst Desmond Supple, of Barclays Capital Markets in Singapore, says that some international banks simply cannot function with the temporary closure of New York's financial district hit in the attack. He says that routine operations - such as trade settlements - are impossible for many institutions. And the closure of the American bond market has worldwide repercussions. "U.S. treasury bonds are not trading which means no global credit markets are trading," he said. "Any company that wants to issue bonds cannot do so at the present moment in time. You have concerns over settlement risks because financial institutions are not operating effectively. Back office support systems have been blown out in some institutions, so again there is limited liquidity."

China's economy is better insulated from the falling demand in Asia, since it relies somewhat less on American exports. The United States takes about one-third of China's output.

However, it too is feeling some short-terms effects of the crisis. Trade officials negotiating its long-awaited entry into the World Trade Organization have postponed their decision following the terrorist attacks. Both China and Taiwan were hoping to receive informal approval to join the trade body by the end of the week.