Perspective: The World Faces Up to Economic Realities; the Much-Anticipated Financial Collapse in the Aftermath of September 11 Failed to Materialise but, as Ashley Seager Reports, the Long-Term Effects Are Starting to Kick In

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Byline: Ashley Seager

A s stunned financial analysts watched New York's twin towers crumble on September 11, many predicted that the terror attacks would drive an already fragile world economy into a deep recession.

In the event, massive injections of liquidity into financial markets and prompt interest rate cuts by central banks across the globe, bringing borrowing costs to their lowest for decades, helped the world's main economies avoid a prolonged slump.

The giant United States economy did flirt with recession, and worries still remain. But those are for reasons related more to the collapse of energy trader Enron and other accounting scandals than to the traumatic events of September 11.

Moreover, as if to emphasise its resilience, the US economy is poised to show the strongest growth of any of the world's leading economies this year although, in truth, it is not being offered much competition at the moment.

Ian Plenderleith, the recently retired executive director of the Bank of England, who was in the thick of the action at the time, recalls the huge uncertainty facing the world's central banks in the immediate aftermath of the attacks.

'It was clearly a major economic shock as well as a huge tragedy in personal terms. No one could know how great the disruption would be. There was a danger of central banks reacting too much or too little,' he said.

The shock came from the immediate disruption to airports and US financial markets in the first few days, the longer-term impact on industries like insurance, tourism and airlines, and then the effect on confidence more generally.

'The judgment was that there would be an impact on confidence and that we needed to take a step, monitor the situation and be ready to take further steps,' he added.

'In the end we did help restore confidence and the judgment has proved to have been about right. The event had a material impact, but it was manageable.'

The US Federal Reserve, which had already been cutting rates to head off an economic slowdown caused by the bursting of the bubble in technology stocks and rising oil prices, slashed its key lending rate by another 175 basis points, taking it down to just 1.75 per cent.

Mr Plenderleith and his colleagues on the BoE's Monetary Policy Committee cut rates in the world's fourth largest economy from 5. …