'Don't panic' leaders tell the markets

Economic fall-out

Chancellor Gordon Brown and President George Bush sought to reassure world markets yesterday that the global economy was "fundamentally strong" amid fears of further falls in share prices tomorrow.

A brutal week of selling on Wall Street and in the City, company layoffs and airline cutbacks was capped when Ernst Welteke, the president of the Bundesbank, said an investigation by the German central bank pointed strongly to "terrorism insider trading", fuelling suspicions that the terrorists sold shares short in airlines and insurance companies before they attacked.

President Bush said: "The terrorists who attacked the United States on September 11 targeted our economy as well as our people. They brought down a symbol of American prosperity but they could not touch its source."

"Our economy has had a shock," he said in his weekly radio address, noting many workers lost their jobs, especially in the airline and hospitality industries, in restaurants and in tourism, as companies struggled to remain afloat despite Americans' fear of travelling.

"Many Americans have also seen the value of their stocks decline," Mr Bush said. "Yet, for all these challenges, the American economy is fundamentally strong."

The Chancellor also sought to steady markets in London before they open tomorrow. Britain and the world were in a better state to withstand the economic shock of the terror attacks than for many years, Mr Brown said. "I think we can approach the decisions we have got to take with greater resolution and greater expectations than we might have 10 or 20 years ago.

"Firstly, because inflation is low in Britain and public finances are sound. Secondly, because around Europe and the rest of the world, inflation is generally low and in most countries public finances are sound.

"Thirdly, because we are seeing great co-operation and decisive action internationally on interest rates and on getting the markets moving and on dealings with the oil-producing countries.

EU leaders also issued a joint statement on Friday stressing the underlying strength of the European economy, but the expressions of support may backfire when trading opens, by highlighting the fears that share selling could lead to stagnation.

In spite of the reassurances, senior ministers believe Mr Brown will be forced to admit in his Pre-Budget Report in November that growth will be well below his target of around 2.5 per cent. That could force the Chancellor to raid his reserves to plug holes in his estimates. Tax receipts could be lower than anticipated, and welfare spending could rise if unemployment begins to increase.

"Gordon is being a bit like King Canute, but he will have to act," one ministerial colleague said. Senior ministers said Mr Brown would not slash public spending, however bad the economic picture looks now. "We were elected on a promise to increase spending on schools and health. If we broke our promises, we could say goodbye to a third term," said one.

John Redwood, a former Tory shadow cabinet minister, said Parliament should be recalled to debate the impact on the economy of the terrorist crisis.