Economists warn of global recession

By Batuk Gathani

BRUSSELS, SEPT. 2. These are troubled times for the 12-nation `euro- zone' economies as the European Central Bank cut the interest rate by a quarter point for the second time this year and the third time since the bank took control of the region's monetary policy in January 1999.

This is widely rated as a ``cautious approach'' with growing signs of economic weakness on both sides of the Atlantic, amid mounting speculation in markets that the world economy may already be in a recession. According to the latest IMF document obtained by a European financial newspaper, economists have warned of a ``significant danger'' of a global recession along the lines of the early 1980s and 1990s slowdown.

The president of the ECB, Mr. Wim Duisenberg, warned that Government leaders and policy makers have ``underestimated'' the effect of the American economic slowdown. However, Mr. Duisenburg still remains vague about the ECB strategy to combat the recession. He did not signal that another interest rate reduction is on the cards. The bank has scaled back euro zone economic growth forecasts and notes that inflation in the euro zone area is subsiding. Mr. Duisenberg said the ECB expected the annual inflation to fall below its target ceiling of two per cent in the first half of 2002.

On the other side of the Atlantic, for the seventh time this year, the U.S. Federal Reserve recently cut interest rates by a quarter point to 3.5 per cent. According to economic observers, Western Europe may not follow the example of the Federal Reserve by aggressively cutting interest rates. The ECB's main lending rate has been brought down from 4.5 to 4.25 per cent which is its lowest rate since August 2000.

The IMF predicts that the world economy may grow by 2.8 per cent only and predicts ``there could be much deeper and more protracted global downturn.'' Such dire forecast has triggered fresh concern among investors and analysts. This is highlighted by a sharp downturn in U.S. consumer spending, the embarrassing decline of industrial output in Japan and growing unemployment in the world's three largest economic powers - the U.S., Japan and Germany.

The German Chancellor, Mr. Gerhard Schroeder, who faces a general election next year, hopes that the country could avoid a recession and growing unemployment. According to the latest opinion poll, Mr. Schroeder's coalition Government of Social Democrats and Greens could fall from power if an election were held today and the centre-right Christian Democrats in alliance with Free Democrats would win. The world's third largest and Europe's biggest economy is widely seen as faltering. Most economists predict that the German economy may now grow by barely one per cent in the current year against the last year's three per cent. Germany's unemployment rate is creeping near the psychological barrier of four million and looks set to go on rising as major and minor companies are reducing staff.

Mr. Duisenberg said the euro zone's economic growth outlook was worse than expected and the area would record a growth of less than two per cent this year. The European stock markets have been driven sharply lower in tandem with the U.S. market. In the U.S., the Dow Jones industrial average fell below the 10,000-mark for the first time since April. This highlights acceleration of pessimism among the average and institutional investors as they lose hope for an economic upturn in the immediate future. Although the ECB has consistently argued that the U.S. slowdown would have a ``limited'' impact on Europe, the reality is that it has hit many European companies with high trade volumes with the U.S.

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Section  : International
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