Global Economy Just Got Weaker ; Economic Forecasts through 2002 Are Slashed. Central Banks Unleash New Money

By David R. Francis writer of The Christian Science Monitor | The Christian Science Monitor, September 26, 2001 | Go to article overview

Global Economy Just Got Weaker ; Economic Forecasts through 2002 Are Slashed. Central Banks Unleash New Money


David R. Francis writer of The Christian Science Monitor, The Christian Science Monitor


Central banks around the world are racing to stave off a global slump that some economists now warn could become one of the sharpest slowdowns of the post-war era.

Before the terrorist attacks on the United States, the major industrialized nations of the world already appeared headed for a rare synchronized downturn. Now, in the aftermath of the tragedy, the US economy is plunging further toward recession - and the effects are starting to ripple around the world.

In just the past few days, several prominent economists have added a darker hue to their forecasts for the world economy. While most don't foresee a slump as long or as deep as the "oil shock" of the early 1970s, others believe it could be more than a short- lived blip.

Almost everything, of course, will turn on how quickly the US economy - which represents about one-quarter of global output - rebounds. A widely watched gauge of consumer sentiment released yesterday did little to instill optimism. The consumer confidence index dropped 16 points last month - the biggest one-month decline since 1990, at the start of the Gulf War.

The numbers, from the Conference Board, a business group in New York, are perhaps skewed by early, post-attack emotions. But they are nonetheless considered significant, since consumer spending has been the main girder holding the US above an official recession.

"The attacks of Sept. 11 are likely to provoke a sharp slowdown in world growth, if not recession," warns Italy's leading industrial group, Confindustria.

To prevent a further downturn, the world's major financial czars have been taking some of the most coordinated - and aggressive - actions since 1985 efforts to deflate the dollar. Central banks in the US, Europe, Japan, Canada, Mexico, and elsewhere have slashed interest rates sharply and pumped liquidity into the financial system in just the past few weeks. Their big hope is that the influential US economy will emerge from recession early in 2002.

When central banks do coordinate policy, it is "more effective" than stand-alone actions, says Tom Schlesinger, director of the Financial Markets Center in Philomont, Va.

The latest monetary decision occurred Monday. The Swiss National Bank, concerned that the Swiss franc was being driven up by investors seeking a supersafe currency, cut short-term interest rates by half a percentage point.

It was only 16 months ago when Federal Reserve policymakers hiked short-term interest rates half a percentage point. They wanted to dampen inflation pressures in the US, and they expected rising prosperity in Europe and elsewhere.

Falling forecasts

But in the past year, the pace of global growth has been slowing, and now economists are rapidly revising forecasts.

Stephen Saywell, a currency strategist in London for Citigroup, is typical. He had forecast a "fairly strong recovery" in the United States in the fourth quarter of this year. Now he expects the economy to shrink.

He and other economists have also scaled down expectations for growth in Europe and remain gloomy for Japan's economy.

On Monday, UBS Warburg in London cut its growth forecasts as well for emerging Europe (Poland, Hungary, Bulgaria, etc.), the Middle East, and Africa.

"If the verdict ... falls at the lower end of our new risk range, it would qualify as the worst global recession of the post-World War II era," Stephen Roach, chief economist of Morgan Stanley & Co. …

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