Greenspan says US activity has 'ground to halt'

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The terrorist attacks on New York and Washington will inflict "significant" short-term damage on the US economy in the short term, Alan Greenspan warned yesterday.

In his first public comments since the attacks, the chairman of the US Federal Reserve Board said the devastation had made Americans more fearful.

The shock of 11 September raised the degree of uncertainty, which could result in less spending, he told the Senate's banking committee.

"That in the short run would imply a lessened current level of activity. Indeed, much economic activity ground to a halt last week," he added.

His comments came as the US government pleaded with Americans not to scrap their spending plans, in an admission that continued consumer confidence is the last defence against a US recession.

Paul O'Neill, the US Treasury Secretary, told senators a return to the office and shopping mall would help the economy bounce back.

"Every American can make a contribution by helping to keep our economy strong, by getting back to work and going forward with the spending plans they made before September 11," he said.

But Mr Greenspan said there was already evidence of sharp falls in business at shopping malls, department stores and car showrooms as "potential purchasers stayed riveted to their televisions".

Production in several sectors had witnessed a "dramatic" slump because of the shutdown in the aviation network, while the financial markets had suffered a "pronounced" impact, he said.

Mr Greenspan admitted that, even before last Tuesday's attacks, signs of an economic recovery were "barely evident".

"Production, employment, and business spending continued to be weak," he said.

On Wednesday the Beige Book, a Federal Reserve regional survey covering the period up to 10 September, showed consumer spending was "flat to down".

Mr Greenspan also warned Congress to fully assess the impact of the attacks before changing policies. "I would strongly suggest that while there is an obvious strongly desired sense to move rapidly, that it's far more important to be bright than quick," he said.

So far this year, the Fed has cut interest rates eight times to help boost an already faltering economy. The most recent was ordered just an hour before New York's stock markets reopened this week after being shut down for four days after the attacks.

Mr Greenspan tried to strike a positive note, even as Wall Street tumbled again. "The foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past."

But many analysts believe the economy will suffer a recession as a result of the terrorist attacks. Merrill Lynch is expected today to become the first blue-chip investment bank to cuts its forecasts for US and world growth in the wake of the attacks. It will say the US is technically in recession as the economy will shrink 1 per cent in the second half of this year. Interest rates could fall as low as 2 per cent.

Meanwhile, a senior member of Britain's Monetary Policy Committee said the UK economy was in "good shape to resume the path of sustained growth looking ahead".

Ian Plenderleith said it would be a "bumpy road" but the evidence so far on the impact of last week's terrorist attacks was "far from entirely negative".

Britain was well placed to weather the "present uncertainties", he told a Scottish business audience.