Down the Tubes.(international economy)

Two weeks is an eternity in politics. In economics, major changes usually unfold over years. So the terrorist attack that triggered an eight-point political earthquake around the world has in some ways dealt the global economy a mere tremor. It's been felt most strongly in the rich countries--primarily the United States--where airlines, aircraft production and the hotel and travel businesses have seen layoffs in the hundreds of thousands. That, ironically, is the good news.

The bad news is that the industrial world was already on the brink of recession. The shock to travel and aviation, plus the blow to consumer confidence in the United States and Europe, will likely be enough to push the rich economies over the edge. The major stock markets already fear the worst. The Dow Jones industrial average of American stocks fell relentlessly last week. It is off 20 percent for September, wiping out $2.5 trillion in shareholder value. The Dow's index for all other world stock markets has dropped 19 percent in the same three weeks. The fault lines opened up by the World Trade Center attack are likely to prove much deeper than they first appeared.

North American production will shrink from now until at least the end of the year. European growth, flat in the second quarter, will likely go negative, too. Japan, already in a slump, will be nudged deeper. These powers account for two thirds of world output. The low- and even middle-income nations, some 140 in all, do relatively little business in airline travel, aircraft production and hotel and resort vacations. But in a month or two these countries' already slowing exports will slow further. Foreign investment will also sink as frightened First World investors pull back their euros and dollars. Most of the poorest 140 may still be able to expand this year and next. But growth, about 2 percent, will be half the rate of last year's and match only the growth in populations. For countries this poor, that spells recession.

A full-scale war in Afghanistan is the one wild card in this forecast. A vast military buildup and then long battle could pump hundreds of billions of dollars into the U.S., European and even Asian economies. This could also raise consumer confidence and spending through its buoying effects on jobs. Conceivably, all this could turn the post- Sept. 11 slump into a couple months' detour along the way to continued growth. But that's merely conjecture. Right now the U.S. and world economies appear to be headed down the tubes.

This isn't the official view, of course. National financial leaders everywhere continue to talk up recovery. U.S. Treasury Secretary Paul O'Neill told Congress last week that the American economy was on the uptick and that stocks will "be higher in six months than they are now." (Stocks fell 10 percent over the ensuing two days.) International Monetary Fund Chairman Horst Koehle also insisted the world will avoid recession. He said the IMF staff's recent forecast for 2.5 percent world growth remains valid for the coming year. But financial officials everywhere are paid to be optimistic--especially in times of crisis.

Private forecasters paint a darker picture. Ed Yardeni of Deutsche Banc Alex Brown says the United States "slipped into a recession just prior to the attack." Yes, agrees Stephen Roach of J.P. Morgan, "and the U.S.-led global downturn has ...