Sun Sept 23, Analysis: Economy Set to Prove Resiliency
By Knut Engelmann
NEW YORK (Reuters) - If history is any guide, it will take a lot more than the physical, financial and emotional damage inflicted by this month's deadly terror attacks to bring the $10 trillion U.S. economy to its knees.
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The world's top economy has been through wars and financial crises, recessions and oil price spikes before -- and almost every time, it came out of it a little bit more resilient.
Despite the huge toll claimed by the suicide strikes on U.S. landmarks, analysts say the economy's enormous resiliency -- marked by its sheer size, diverse structure and a strong banking system -- will help it overcome this crisis as well.
``The economy will get through this. Every downturn ends,'' Joseph Stiglitz, former World Bank chief economist, said. ``The only question is how long it will take -- will it be three months or three years?''
The strikes on the United States have fundamentally altered the outlook for the U.S. economy, which was already at a standstill before the attacks. Now economists say it is firmly in the grips of recession, something Americans have not experienced in a decade.
Consumer confidence, the key driver of economic growth, was hit hard and few economists dare to predict how long it will take for the usually spend-happy American consumer to recover. The threat of a drawn-out U.S. retaliation campaign has added an additional layer of uncertainty and insecurity.
``The attacks are going to make the recession deeper and steeper than it would otherwise have been,'' warned Barton Biggs, chief market strategist at Morgan Stanley.
WASHINGTON TO THE RESCUE
The speed of the economy's recovery will depend in large part on Washington, where policymakers across the political spectrum have been quick to think up billions of dollars in fiscal stimulus plans to pull the economy from the brink.
``A very aggressive monetary and fiscal stimulus will help us get out of this,'' Mickey Levy, chief economist at Banc of America Securities, said. ``A very well capitalized banking system and liquid capital markets will also help.''
The Federal Reserve has slashed interest rates to cushion the downturn, kicking off a series of global rate cuts, and most expect it to cut borrowing costs further this year.
``Activist macroeconomic policymakers will force the V-shaped recovery,'' in which a sharp downturn is quickly followed by an equally sharp upturn in growth, Levy said.
Levy expects the U.S. economy to contract by 1.7 percent in the fourth quarter of the year, but forecasts growth to rebound 1.5 percent over the first three months of next year.
Economists at UBS Warburg said the U.S. economy would not start to grow again before the second quarter of next year. But they said the rebound was likely to be strong, forecasting growth of 3.0 percent over the previous quarter.
Fighting the gloomy mood, both Fed Chairman Alan Greenspan and Treasury Secretary Paul O'Neill took to Capitol Hill last week to reassure a frightened public that the U.S. economy will bounce back.
``Our economy -- our prosperity -- will not be destroyed,'' O'Neill told the Senate Banking Committee, while conceding that, ``we cannot say at this very preliminary stage exactly how these events will affect the economy.''
Greenspan, widely revered for his economic leadership in good times and bad, was equally upbeat. ``Indeed, much economic activity ground to a halt last week. But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past,'' he said.
The 75-year-old central banker, who orchestrated a speedy round of global interest rate cuts just days after the September 11 attacks, has seen his share of financial and economic turmoil since he took the helm at the Fed in 1987.
Greenspan got his current job just two months before Wall Street's ``Black Monday'' crash in October that year. His deft handling of that crisis -- immediately offering to pump money into the system to prevent the panic from spreading -- established him almost overnight as a mighty force to be reckoned with.
Four years later, Greenspan saw the economy through its last recession in 1990-91, which coincided with the Gulf War.
MR. FIX-IT
More recently, Greenspan won praise for his deft handling of the Asian financial crisis and its aftershocks. Worried by the effects of rapidly spreading turmoil in many emerging markets that threatened to seize up U.S. financial markets, the Fed slashed borrowing costs and pumped money into the economy.
``The system was holding up ... the American economy kept getting battered and battered and battered and it was still standing and indeed, as of September 10, it was still standing,'' a reminiscing Greenspan said on Thursday.
The accumulated goodwill capital should stand him in good stead as he mulls the Fed's response to the strikes that hit the U.S. financial system's heart.
``He's a very steady hand, I'm sure he's going to do the right thing,'' Banc One's Johnson said.
Of course, the diverse structure and the sheer size of the U.S. economy will give Greenspan a helping hand. While the nation's manufacturing sector has contracted markedly, U.S. banks are sound and well capitalized, helping them to withstand the temporary losses caused by the destruction of the World Trade Center and the loss of infrastructure.
And while the burst of the technology bubble has wiped out vast swathes of the ``new economy'' over the past year, spending on new computers and telecommunications equipment in the wake of the strikes may help some of that industry turn the corner.
``This economy is remarkably resilient,'' Johnson said. ``All the risks are to the downside for a short while, but I feel very strongly that the economy will reaccelerate in a very healthy, strong way sometime next year.'' |
