The economic fallout from the September 11th attacks on the United States dealt a blow to economic prospects for global economies, including that of Ireland, and caused the most widespread worldwide slowdown in two decades, the International Monetary Fund said yesterday.
While directed against the US, the attacks hit European economies that were already slowing because of regional and global shocks, including higher oil and food prices. Economic prospects in the euro area have since deteriorated further, the IMF said in a revised version of its World Economic Outlook.
However, while economic growth will be reduced in the Republic, it will still be one of the highest in the developed world next year, according to the IMF's revised figures. The Gross Domestic Product in Ireland will fall from 3.9 per cent to 3 per cent for 2002, it said. It also forecast only a modest rise in the unemployment rate in Ireland next year, up from the current 4.3 per cent to 4.5 per cent.
The IMF lowered its projected growth rate for the euro zone as a whole, from 1.2 per cent to 1 per cent. "Part of this downward revision reflects the carryover effect on growth in 2002 from recent data indicating growth was weakening even before September 11th," it said. The IMF singled out Ireland, Finland and the Netherlands as euro countries that "appear to have a greater scope for a cautious easing of fiscal policy if downward pressures on activity prevail". It says there was less room for manoeuvre in Germany, France and Italy, given the 3 per cent deficit ceiling under the Stability and Growth Pact.
Inflationary pressures in the euro countries were weakening, the IMF indicated, and after lowering interest rates by 1.5 percentage points in 2001 "there will still be room for additional easing if necessary" by the European Central Bank.
Indicators of industrial production, service sector activity and business confidence had weakened throughout the euro area, while consumer confidence had also declined.
However, the Fund said the euro zone was less vulnerable than the United States to adverse shocks to confidence and activity. Its external balances were stronger, households less indebted and less exposed to stock market developments, and business concerns about over-investment and over-capacity appeared to be lower.
"But to underpin a robust recovery it is critical - both for Europe and the rest of the world - that such strengths are complemented by more aggressive structural reforms to labour, product and finance markets and other areas that have been holding down Europe's potential growth rate and contributing, at least indirectly, to broader imbalances in the global economy."
The IMF said it believed that the introduction of the euro would support the structural reform process by increasing price difference transparency and reducing the costs of financial transactions.
The Washington-based body slightly scaled back its estimate for US economic growth this year to 1 per cent from the 1.1 per cent it estimated a month ago. It said growth in 2001 would be 0.7 per cent. The fund's chief economist, Mr Kenneth Rogoff, later told reporters that a recovery from the US recession, which began in March, should become apparent by the second quarter next year and gain momentum as the year wore on.
The timing and strength of the recovery were in question, however, because the impact on consumer optimism from the September 11th attacks remained uncertain. "Our projections call for growth in the United States really beginning already in the second quarter and strongly by the second half of the year," Mr Rogoff said.
The revised report was compiled because the bi-annual IMF World Economic Outlook, issued in October, did not take into account the impact of the September 11th attacks on New York and Washington.
Interestingly, it points out that "even excluding the injury costs, the damage inflicted by Japan's Kobe earthquake in 1995 - which had little impact on the path of the Japanese economy - was much greater than that caused by the September 11th attacks, in both absolute terms and relative to GDP". The attacks on America, which the US government estimated did $16 billion (€17.7 billion) in damage, actually boosted demand in construction and defence spending, and reinsurance abroad meant a net inflow to the US of $11 billion dollars.
However, because of the size and premeditated nature of the attacks, there were likely to be more lasting effects on industries, most notably airlines, aircraft manufacture, hotels, insurance, leisure activities and the postal service.
Despite the uncertainties, the IMF pointed to a number of factors that could encourage a bounce back to robust growth later next year. These included "the recent reduction in energy prices, the ending of the inventory cycle downturn, the recovery in equity prices and somewhat stronger levels of consumer and business sentiment about the future compared with the present".
"Most important, there is now significant macroeconomic stimulus in the pipeline. While there are good reasons to expect a recovery to get underway in 2002, the outlook remains highly uncertain and there is a significant possibility of a worse outcome," the IMF said.
