George moves to calm fears as forecasts fall

War on Terrorism: Economy

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Leading article: War jitters are slowing down the world economy

The Governor of the Bank of England moved to calm fears yesterday that Britain was heading for a recession following the terror attacks on the US as City analysts slashed their growth forecasts for next year.

Sir Edward George cautioned that it was "too soon to say" what was in store for the British economy but said that high street sales had plunged by almost a third in the days after the outrage.

He said the attacks "could not have happened at a worse time" and hinted that the Bank was ready to cut interest rates when it meets next week. "The overall impression is that we will see some weakening during the current quarter and perhaps in the next quarter. Looking beyond that situation, it's very difficult to see what's changed fundamentally."

His remarks came as a firm of economists said £500bn – the equivalent of half the entire output of Britain's economy – would be wiped off world growth next year.

Sir Edward said there was an "absolutely immediate impact" on the confidence of households. "It was shock. For a couple of days people did not go to the shops," he told BBC1's Breakfast with Frost. "That week there was a 30 per cent fall in retail sales."

This startling news, which has been contradicted by the UK's major retailers in recent days, will be fed into the information used by the Bank of England's Monetary Policy Committee when it sets rates. The MPC will hear the Bank's assessment of the impact on Friday, ahead of its formal meeting next Wednesday and Thursday. "We'll be looking for what's happening in terms of the immediate impact," Sir Edward said.

The Bank ordered a surprise quarter-point cut in rates last Tuesday – its fifth so far this year – after the US Federal Reserve cut by half a point. UK rates are now at 4.75 per cent, their lowest since 1964.

Amid growing talk among economists in the City of London that the terrorist attacks might plunge the world into recession, Sir Edward tried to calm fears, saying it was too soon to say.

His comments were echoed by Gordon Brown, the Chancellor of the Exchequer, who was in Belgium for a meeting with European Union finance ministers. "We face these troubled times in a better position than 10 or 20 years ago," Mr Brown said. However, he admitted the impact had been "very severe indeed, in America and other parts of the world".

In a report to be published today, the Centre for Economics and Business Research said the terror attacks had forced it to cut its forecasts for world and UK growth next year.

It expects the UK to grow just 1.3 per cent compared to its previous forecast of 2.2 per cent. This would wipe £12.6bn off annual output. The Bank of England will cut rates to 3.5 per cent in response, it said. It cut world growth forecasts from 3.0 to 0.8 per cent, which would wipe $680bn (£475bn) off output.

Douglas McWilliams, the report's author, said: "The world economy has been dealt a blow which will depress world growth for nine months and possibly for longer."

In the City, investment bankers at Salomon Smith Barney cut forecasts for next year to 2.0 from 2.25 per cent while Dresdner Kleinworth Wasserstein cut growth in 2002 to 1.8 from 2.7 per cent. Lehman Brothers are set to forecast just 0.6 per cent. The Treasury's current forecast is for between 2.25 and 2.75 per cent but this will probably be revised down to a range of 1.75–2.25 per cent in November when it publishes the pre-Budget report.

The gloom has been compounded by the plunge in share values around the world. The London stock market tumbled 10 per cent last week while, in the US, the Dow Jones fell 14.3 per cent, its worst week since 1933.

Sir Edward said the markets would remain volatile because of nervousness over the military response. "That's going to be the next concern," he said.