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. Last Updated: 07/27/2016

Economies Await U.S. Consumer Data

HONG KONG -- U.S.-led strikes on Afghanistan have deepened uncertainty over a dire world economy despite weekend efforts by the Group of Seven nations to shore up confidence, economists said Monday.

They said the reaction among U.S. consumers would be key to any possible recovery, but for now the mood was extremely cautious.

"The world had bet on the fact that the U.S. consumer would start to do all right. Now we expect consumption to slow quite markedly in the months ahead," said a senior economist at one U.S. investment bank in Hong Kong. "This conflict isn't helping."

The return of U.S. consumer confidence -- at 5-1/2-year lows, with unemployment at four-year highs and rising -- is the crucial factor economists want to see before calling the start of an economic recovery.

Analysts at Dutch investment bank ING Barings forecast U.S. private consumption growth would sink to 2.7 percent in 2001 from 5.3 percent a year ago, recovering to only 3.2 percent in 2002.

The United States led bombing raids on Afghanistan on Sunday.

Global growth forecasts have been slashed since the attacks in New York and Washington on Sept. 11, with the prevailing view that their negative impact on U.S. consumer sentiment has tipped the world economy into recession.

The World Bank sharply cut its 2002 forecast for growth in industrialized countries to between 1 percent and 1.5 percent from an original estimate of 2.2 percent in the wake of the attacks, and major investment banks have made similarly sharp revisions.

But analysts said with most downside already factored into prices during the month since the Sept. 11 attacks in anticipation of retaliation, the moves were within expectations.

"It all depends on what the strikes achieve," said Li Lian Ong, regional economist at Macquarie Bank in Hong Kong. "The strikes could be very successful and everyone will be upbeat, or things could drag on for months and nothing would be achieved," Ong said.

Economists said they wanted the dust to settle around any knee-jerk reaction to the retaliation before considering if further revisions to forecasts were necessary.

"This U.S. military response was by and large expected by the markets. It was not a question of if they would, but when and how ferocious the attack [was going to be]," said Mike Moran, north Asia economist at Standard Chartered Bank in Hong Kong.

"We have to assess how stability really pans out over the next six months and certainly for the course of this military response," he said.

Investors in Asian trade were more certain than ever the Federal Reserve would cut U.S. interest rates again, despite the nine cuts so far this year, marking one of the most aggressive easing phases on record slashing rates to near 40-year lows.

Some Fed watchers in New York say the central bank could be considering cutting nominal interest rates to zero -- a policy adopted by Japan in a bid to restart its sickly economy.

"With a contraction in nominal GDP likely, at least for the U.S. and Japan in the current quarter, it is important that the funds rate be lower than nominal GDP until the fiscal stimulus package kicks in," Paul Markowski, president of Global Strategies Analysis Group said in a note to clients.

"The policy dilemma is that ... the financial markets will begin to think too loudly about a potential for a liquidity trap that could drive the dollar and stock markets lower and long-term interest rates higher, causing a significant reduction in consumer confidence and economic growth," Markowski said.