The economic effects of the current international crisis have been most immediately felt by the airline industry and the insurance sector. But many economists now feel that a global recession is almost inevitable as the US and its allies launch reprisals for the September 11 attacks.This content was published on October 14, 2001 - 09:13
Even before last month's events, growth forecasts for both the developed and developing world had been revised sharply downwards. Now, the International Monetary Fund says the slowdown could be even worse than expected.
"There is no doubt that the attack is having a negative effect on activity now in many regions of the globe and that it has increased what were already significant risks to the global outlook," says the IMF's chief economist, Kenneth Rogoff in a recent report.
The airline industry has laid off more than 100,000 people in the last month, insurance companies have been revising their exposure sharply upwards and stock markets have seen wild swings.
Switzerland has not been immune. The national carrier, Swissair, already in deep trouble before last month, has collapsed and Zurich Financial Services has doubled the amount it expects to pay out in claims.
But some analysts say the IMF is still being typically optimistic about global conditions.
Signs of recession
"The world economy is already in recession," says Swiss economist, Marc Faber, "If you look at the Asian economies with their very significant decline in exports, if you look at the US where industrial production has been down for 11 months in a row and if you look at the collapse of capital spending worldwide, then I would say we are in a recession already."
The US has been the world's engine of growth for the past decade but even though American GDP is still in positive territory, some say that based on most criteria, it is already in recession.
Many believe it's only the Americans' love of credit that has maintained the economy's growth.
"What has kept US GDP positive is consumer spending but if we analyse consumption, it's only because of additional borrowing by the consumer," says Faber.
"The refinancing boom in the mortgage market has led to increased credit. The consumer has taken equity out of home ownership and has spent it, but I feel consumer spending will now feel off a cliff in the weeks ahead."
Faber adds that house prices are unlikely to increase any further and that interest rates, already at their lowest for 40 years, can't go down much further.
The extraordinary events of the last month have also seen the return of some unfashionable economic policies. State aid for the airline industry would have been unthinkable before September 11 but now governments all over the world are granting emergency bailouts.
For an industry that was already beset by the problem of over capacity, the money is more than welcome but some argue that it should have been left to cold market forces to sort out the industry's chaff.
Airlines lacked reserves
"Why should the airline industry be given preferential treatment," argues Faber, "why not the trucking industry. The airlines already suffered from a weak financial structure; they had no reserves and should be left to go bankrupt. Other companies can then step in and restructure the debt."
The seeds of today's recession, Faber says, were sown in the boom years of the last decade when the financial markets and the governments allowed expansion to spiral out of control into an unsustainable boom.
Overvalued stocks in the technology and telecommunications sector crashed back down to earth last year and the knock on effect is now being felt throughout the whole economy.
How long the downturn will now last is anyone's guess but Faber is not optimistic.
"We had a very strong expansion between 1990 and 2000," he says, "It was the longest ever period of US growth and now I think the recession will be similar to Japan's since 1990."
That means very low growth, negligible corporate profits and poorly performing stock markets.
But others aren't so gloomy. The IMF, for example, expects a relatively rapid recovery next year as long as policymakers take the appropriate action to mitigate the impact of the crisis. For the IMF, that means low interest rates, the maintenance of public spending plans and action to prevent banks and other financial institutions from going bust.
Time will tell whose prognosis carries more truth.
By Michael Hollingdale.
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