Global Recession Near, Some Economists Say
Confidence, Already Damaged by U.S. Slump, Further Dented by Attacks and War Concerns

By Steven Pearlstein
Washington Post Staff Writer
Wednesday, September 26, 2001; Page E01

A growing number of private economists have concluded that the global economy, already weak before the terrorist attacks on the United States, is now headed into recession.

The expected contraction of the U.S. economy, for a decade the engine of growth of the global economy, is the major factor driving the worldwide downturn.

"It's unavoidable -- if we go down, everyone does," said Rudiger Dornbush, international economist at the Massachusetts Institute of Technology.

Forecasters say the terrorist attacks on the World Trade Center and the Pentagon, and the prospect of military conflict, have also undermined the confidence of consumers and investors around the world.

"There is little doubt that the scale of the destruction of economic value, combined with the loss of confidence, will precipitate one of the most severe global recessions in recent memory," declared David Folkerts-Landau, head of global markets research at Deutsche Bank, adding that only an unprecedented effort by industrialized countries to stimulate their economies could avert such a downturn.

"The shock to confidence and wealth, along with the temporary disruptions in travel and transportation, have turned the risk of global recession into a reality," said Kim Schoenholtz, chief economist at Salomon Smith Barney Inc.

According to forecasters, Japan and the United States -- the world's two largest economies -- are already in recession, with growth in Europe and Canada hovering above zero. Other countries whose economies are closely tied to the United States are also being dragged down. They include Mexico, Malaysia and Singapore, where exports to the United States account for more than 40 percent of the economy, along with much of the Caribbean, which depends heavily on U.S. tourism.

The attacks have exacerbated problems for Latin American economies that were already struggling with their own financial crises, and for many African countries that have been hard hit by falling commodity prices.

Only China, India, Russia and a number of smaller developing countries are likely to elude the recession's reach.

These private assessments are somewhat darker than that of the International Monetary Fund, which is scheduled to release its annual World Economic Outlook today. While the fund has reportedly cut its forecast for world growth substantially, its new deputy director, Anne Krueger, said this week that she thought a full-blown recession could still be avoided.

Opinions vary within the economics profession as to just what constitutes a global recession.

In the context of an industrialized country such as the United States, the shorthand definition for recession is a six-month period in which economic output -- the gross domestic product -- declines. Applying that definition to the world economy, there hasn't been a genuine global recession since the 1930s.

But other analysts note that in much of the developing world the bad things usually associated with recession -- rising unemployment, declining household incomes -- occur even in times of slow economic growth. That's because populations in those countries are growing much faster, while the adoption of labor-saving technology can dramatically reduce the demand for workers. For that reason, economists at the IMF and elsewhere reckon that there is a global recession any time the world economy grows at a rate of less than 2.5 percent

Wherever the line is drawn, the global economy was already experiencing its most abrupt slowdown in recent memory -- from about 5 percent last year to, at best, 2.5 percent for all of 2001. The annualized growth rates for the remaining months of the year are almost certain to fall, at least temporarily, below 2.5 percent.

"We've come down nearly 3 percentage points, which on a global basis is a huge difference," said C. Fred Bergsten, managing director of the Institute for International Economics in Washington "That's what has created the feeling of a recession, whether or not this actually meets the technical definition or not."

Bergsten now predicted that the terrorist attacks may turn out to have their greatest economic impact outside the United States, where the underlying fundamentals remain strong.

"Shocks hit hardest on those already in the toughest shape," he said, noting that stock prices have fallen more in Europe, Japan and South America since Sept. 11 than in the United States.

At the World Bank, chief economist Nick Stern estimates that the terrorist attacks, and the resulting declines in trade, cross-border investment and commodity prices, will knock 1 percentage point off the growth rate of developing countries, on average. "To put in in stark human terms, that means tens of thousands more children who will die from malnutrition and disease and tens of millions of people forced to live on less than $1 a day," he said.

Many economists warn against trusting these forecasts, noting that much remains uncertain, particularly the course of the upcoming war on terrorism.

Also unclear is what the major industrial countries are prepared to do to keep recessions short and shallow by cutting taxes and interest rates and temporarily increasing government spending. U.S. officials are expected to press Europe and Japan to take more aggressive steps when finance ministers and central bankers from the Group of Seven countries meet in Washington on Oct. 6.

But Jeffrey Sachs, director of Harvard University's Center for International Development, warned that the disruptions caused by the Sept. 11 attacks, and the changes they are likely to cause in the way global business is conducted, are unlikely to be affected by fiscal and monetary policy.

"This is not a situation where classic macroeconomic stimulus is likely to prove particularly helpful," he said.