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ATTACK ON THE U.S.

Saturday, Feb. 4, 2006

BMO economist sees U.S. recession

By MARIAN STINSON
Thursday, September 13, 2001

One of Canada's best known economists predicts that Tuesday's terrorist attacks will tip the U.S. economy into recession, although most experts are more optimistic about the resilience of consumer confidence.

"This will mean a global recession," said Sherry Cooper, chief economist at BMO Nesbitt Burns Inc. "The timing of the attack was as well orchestrated as the hijackings, as the U.S. economy was already on the razor's edge of recession."

The attacks will damage consumer sentiment and "we can expect a substantial plunge in U.S. GDP growth in the remainder of September and through the fourth quarter at least," she said.

Central bankers injected $100-billion (U.S.) into the financial system to guarantee its smooth operation until normal activity resumes. As well, the U.S. Federal Reserve Board and the Bank of Canada are expected to cut interest rates soon to shore up the economy.

The huge disruption to U.S. and Canadian airports will contribute to the recession, and global trade will slow further, exacerbating the multinational slowdown that is already under way, Ms. Cooper said.

Growth in the United States will fall 1 per cent in the third quarter, owing to the sharp pullback in September activity, she explained, and could contract at a 4-per-cent to 5-per-cent annual pace in the fourth quarter.

Some spillover will continue in the first quarter of next year but growth could resume by the spring and she expects a solid rebound to take place at that time, she said.

Others see the U.S. consumer bouncing back quickly, with recent tax rebates helping to fuel spending.

"Don't underestimate the resilience of the U.S. consumer," said Michael Manford, economist with Canaccord Capital. "Generally, there's a huge difference between what Main Street and Wall Street are talking about."

The impact of the tragedy will be diminished by the recent tax cuts in the United States which will help offset the psychological blow. "Real take-home pay is now powering along at a very strong 4.5 per cent [growth rate], only 1.5 per cent of which is the tax cut," Mr. Manford said.

He is standing by his forecast of consumer spending rising by 2.25 per cent to 2.5 per cent in the second half of the year.

"While the tragic event likely constitutes the largest disaster ever to hit the U.S., the economy is large enough to take it without a major collapse," he said.

The Fed could trim interest rates as soon as markets open, by one-quarter or as much as half a percentage point, Mr. Manford said.

So far this year, the Fed has cut interest rates by three percentage points, dropping the federal funds rate to 3.5 per cent from 6.5 per cent.

Jeffrey Rubin, chief economist at CIBC World Markets had already forecast the Fed would lower interest rates by 75 basis points by the end of the year. (A basis point is 1/100th of a percentage point.)

"While this week's events may not change the scope of the easing efforts, it will likely advance the timetable, with a 50-basis-point cut coming in the October meeting," he said, and the Bank of Canada matching the move. The Fed's policy committee meets Oct. 2.

"An already visibly weakened U.S. economy will likely contract in the third quarter as a result of [Tuesday's] tragic events," Mr. Rubin said. The loss will result from missed work in New York, Washington and other major centres, airline and hotel cancellations and postponed events which will subtract half to a full point (annualized) from third quarter growth from an economy that already looked close to flat.

Some of the negative impact will be reversed in the fourth quarter due to the rebound in days worked and clean-up efforts, but the travel and hospitality industries will suffer enduring effects, he added. "But broader consumer sentiment could also be eroded, depending on the scope and consequences of U.S. retaliation, and the perceived risks of further terrorism on American soil."

"A no-holds-barred war between the U.S. and Afghanistan would not last long, but we don't know who the U.S. will hold responsible. If it's Iraq it's a different story. It would be a more protracted dispute," Mr. Rubin said.

Most economists see this week's events having a short-lived impact, with financial markets not trading and air travel grounded for a couple of days.

"But it's premature to be changing economic forecasts for the quarter or beyond," said Ted Carmichael, chief economist at J.P. Morgan Canada Inc.

"The U.S. and other industrial economies need not go through a period where confidence declines sharply," he said.

Many economists see life returning to normal before long. Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., cautioned about naysayers. "Worry-warts will argue that the United States was on the verge of recession going into [Tuesday's] events and therefore must be pushed over the brink into economic decay and by this catastrophe in New York."

He disputed this view, describing the U.S. economy as "powerful, resilient and fundamentally sound," well into the foreseeable future.





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SPECIAL
Voices From After the Fall, The Facts Behind the Fear, and the preview of a new Discovery documentary filmed at Ground Zero.


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  • Six-month Memorial for Sept. 11 - U.S. President George Bush speaks from the White House. "The terrorists will remember Sept. 11 as the day their reckoning began," he said.

  • In Canada - Relatives of Canadian victims of the World Trade Centre attacks wonder why there's no six-month memorial here at home.

    CTVNEWS.com video reports



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