Terror attacks 'are tipping the world economy into recession'

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The Independent Online

The terrorist attacks on the United States will tip the global economy into recession, the world's leading financial watchdog warned yesterday.

The International Monetary Fund (IMF) said a recession in America was a "done deal", while the rest of the world was on the brink of a slump even before the suicide plane attacks on New York and Washington. The bleak outlook came as the first survey of the British economy since the outrage showed that confidence among British consumers had plunged to its lowest since the previous recession 10 years ago.

The IMF cut its forecast for world growth from 3.2 per cent to an eight-year low of 2.6 per cent. Economists regard global growth of 2.5 per cent as a recession. The IMF said its forecasts were drawn up before the 11 September attacks, which it warned could drag growth below even that low level. The 2002 forecast was cut to 3.5 from 3.9 per cent.

Kenneth Rogoff, its chief economist, said: "There is no doubt the attack is having a negative effect in many regions of the globe. It has increased what were significant downside risks to the short-term outlook."

The main casualties will be Japan, which is expected to shrink 0.5 per cent this year, and America, which is now likely to grow by only 1.3 per cent.

The IMF said Britain would grow by only 2 per cent this year ­ the lowest growth since 1992. This means the Government will miss its target of between 2.25 and 2.75 per cent. That, in turn, could jeopardise its spending plans, which are based on growth of 2.25 per cent a year.

John Butler, UK economist at HSBC, said Gordon Brown would have to cut his forecasts in November's pre-Budget report, perhaps to 1.75 per cent. He said the Chancellor risked breaking the rules ­ which prevent him racking up huge deficits ­ if growth stayed at 2 per cent in 2002. "Were that to happen, Mr Brown would be under pressure to scale back his spending plans or raise taxes in the approach to the next general election," he said.

A Treasury spokesman said it was too early to speculate, adding: "The IMF shows us to be the fastest-growing country in the European Union both this year and next."

Further interest-rate cuts in America and Britain are now a certainty, most economists believe. The Bank of England was criticised last week for cutting rates by only 0.25 points to 4.75 per cent instead of following the US Federal Reserve lead with a half-point cut.

Richard Iley, a UK economist, forecast that rates would fall to 4 per cent by the end of the year, their lowest for 50 years. "The collapse in world trade and lower share prices will force the Bank to shore up consumer demand," he said.

There was more gloom for Britain with news of further job cuts and a warning that the tourism industry could lose as much as £2.5bn from the effects of the terrorist attacks and foot-and-mouth disease.

Shorts Brothers is cutting 900 jobs by February and said a further 1,100 would go unless the world economy recovered markedly. Delta Air Lines announced 13,000 redundancies. Air Canada will cut 5,000 jobs, Scandinavian Airlines Systems 1,100, and Bombardier, Shorts' Canadian parent, up to 6,500. British Airways and Virgin Atlantic will cut 8,200 jobs and Boeing, the giant American aircraft manufacturer, 30,000.

The British Tourism Authority said the airlines' decision to cut flight schedules would lead to a sharp fall in overseas visitors. Spending by foreign tourists, originally forecast at more than £13bn for 2001, was now likely to be about £10.8bn, the authority said.

David Quarmby, its chairman, said: "It's been something of a double whammy year for tourism. It's the cumulative effect of the foot-and-mouth outbreak since March and the terrorism attacks in recent weeks." He said the situation would worsen if military strikes were launched and predicted 75,000 jobs were at risk.

* Public confidence in the economy has collapsed since the terror attacks, an opinion poll says today. Voters are now more pessimistic about the economy than at any time since 1980, when Britain faced severe recession.

The Mori index in The Times, measuring the proportion of people who think the economic position will improve rather than decline over the next year, is now minus 56 points. Last month, it was minus 31 points.