[VIEWPOINT]A Post-Terror Recession? Not Necessarily

The deadly terrorist attacks in the United States caught the world's attention, as they were broadcast live on television all over the globe. It was more shocking than any movie scene. On a clear autumn morning, two passenger jets carrying innocent passengers hit the 110-story twin towers of the World Trade Center near Wall Street, the international financial center, about 15 minutes apart, exploding in huge fireballs as if they had been missiles.

As the search and recovery operations are still under way for thousands or even tens of thousands of those dead and injured, and the whole world is overwhelmed by astonishment, economic experts are already analyzing the impact of the assault on the U.S. and global economy. The general opinion is that the already struggling U.S. economy has been hit hard by the terrorist attacks and will likely plunge into a recession.

Experts predict that private consumption in the United States will decline sharply, as American consumers, already discouraged by last month's higher-than-expected jobless data and a series of layoffs by corporations, will likely become more cautious in the wake of disaster.

Secondly, international crude oil prices are rising, as the threat of war engulfs the Middle East after Washington's announcement of its firm determination to wage a retaliatory attack against those responsible for the attack, as well as those who harbored the attackers. The situation resembles that of the U.S. economic slump just before the Gulf War in the early 1990s.

Thirdly, the U.S. economy, which grew at an annual rate of 0.2 percent in the second quarter, is showing no signs of recovery in the third quarter, according to a study by the Federal Reserve Bank of San Francisco.

Finally, experts project that the industries hardest hit by the terrorist assault would be airlines, travel, hotels and the financial sector.

Japan, South Korea, Taiwan and Hong Kong are the Asian economies most sensitive to the possibility of a U.S. recession. Of course, it is no wonder that those economies have a particular interest in the direction of the U.S. economy as they depend heavily on it for exports, particularly in the information-technology sector. It is understandable that they are perplexed by such pessimism as has been voiced since the attacks.

However, overwhelmed by the current crisis, we may come up with myopic conclusions about our economic outlook. Thinking coolly, we cannot say that the macroeconomic trend of the U.S. economy has changed fundamentally because of the terrorist assault. Private consumption, which accounts for two-thirds of the U.S. economy, grew at an annual rate of 2.5 percent in the first six months of this year. The Bush administration's tax cut will deliver $600 to each American household from the third quarter on, positively affecting private consumption. Also, the U.S. Federal Reserve Board is expected to be more aggressive in cutting interest rates in an effort to boost the crisis-hit financial markets. Such a policy would fuel the brisk housing business. In addition, Washington will likely increase its defense budget significantly in the wake of the attacks, and the military industry and high-tech sector stand a high chance of a boom.

The potential change in Washington's political atmosphere may have more significant impact on the U.S. economic outlook than anything else. Until last week, Democrats and Republicans were wrangling over the dwindling U.S. fiscal surplus. Now, both parties are of one mind in accepting any demand from the Bush administration for budget spending. If a recession seems likely, the U.S. government is expected to willingly run a deficit to boost the economy.

Because the sudden shift in Washington's politics may affect the U.S. economy positively, there is no need for rash forecasts of a depression. The impact of the terrorist assault on the U.S. economy will not necessarily be negative. In my opinion, financial markets around the world may be on a rollercoaster ride in the short term. Still, it is very likely that the U.S. authorities will cut interest rates dramatically and, if necessary, implement fiscal policy to stave off a possible recession so that the U.S. economy is able to get on the track to recovery.

-----------------------------------------------------------------------

The writer is a professor of international banking and finance at George Washington University.

by Park Yoon-sik