Recovery threatened

THE US economy was in recession prior to September 11. The tragedy, from an economic view, could be seen as a “slightly positive development,” a leading economist said yesterday.

In the days following September 11, the world feared the tragedy would send the globe into a prolonged and deep recession, Friends First chief economist Jim Power said. It spurred people into actions which would not otherwise have been taken, he said.

“In response to those very justified concerns, a very strong official response was taken. The Federal Reserve, the European Central Bank and the Bank of England all slashed interest rates following September 11.

“At the same time, governments globally, led by Bush’s administration, started to cut taxes and started to increase government spending. So we got a very strong stimulus from this policy. The bottom line was that strong official response to the shock, the interest rate slash and looser fiscal policy, sowed the seed for economic recovery. That economic recovery started to come through quite strongly.”

The US economy began to recover in the first quarter and it continued into the second quarter of this year. We were all starting to become more confident that the global economic cycle had passed into profit and things were starting to improve.

“But over the past three or four months, that recovery came under serious threat. It has come under serious threat in a manner that suggests that over the next couple of years, the outlook for the US economy remains problematic. We’ve seen most if not all indicators start to turn down, mainly because of the performance of the equity markets.

“They transmit to economic activity in two ways. If they fall, they undermine consumer confidence. For the US consumer, equities present a serious part of household wealth. When they fell in value, the consumer feels their wealth eroded.

“The outlook now is one of cautious optimism,” Mr Power suggested.