-Caveat Lector- Saturday March 24 7:37 AM ET Warnings of Global Recession Grow Louder By Daniel Sternoff NEW YORK (Reuters) - As global stock markets topple, the Japanese and U.S. economies sputter and financial seams begin to pop in major emerging markets, anxiety is bubbling into financial markets that the world may face its first global recession in a quarter century. The alarm is not yet full-throated. Analysts are slashing forecasts for world growth but still looking for modest global expansion in 2001. But the distress signals were strong enough this week to spur central banks around the world to warn that their home-grown problems may be exacerbated by a darkening international outlook. ``The concern is that a synchronous global slowdown can accumulate into a recession. We would say the odds are pretty high at 1 in 4,'' said Allen Sinai, chief global economist at Decision Economics. The world's top economies have not simultaneously fallen into recession since 1974, after the 1973 oil shock battered industrialized nations. Different business cycles and regional diversification have generally ensured that when one part of the world slows, another center has been able to pick up the slack. But the accelerated globalization of markets, firms and industries in the 1990's means world business cycles are more closely intertwined, leaving the world more susceptible to common shocks. And a potent cocktail of rising global interest rates in 1999 and soaring energy costs, tumbling equity prices and a world technology slump in 2000 appear to have combined to engineer a world slowdown in 2001. The problem is that when all ships begin to sink, there is no one left to throw the world a lifeline. ``World economies are now so tightly intertwined in trade and finance and even in policy that if a big chunk of the world economy goes down, it can bring down the whole,'' Sinai said. International Monetary Fund (news - web sites) Managing Director Horst Koehler this week said the world economy was slowing much faster than expected. He forecast 2001 world growth of 3.4 percent -- a benign expansion -- but that is well below a September forecast of 4.2 percent growth, and 4.8 percent in 2000. Many private analysts have lower forecasts, and expectations are clearly headed down. Engine Troubles In the 1990's, the booming United States was the backbone of global stability as Japan drifted in and out of recession, financial crises roiled Southeast Asia and Latin America, and Europe slogged ahead with lukewarm growth. But Japan's economy is again at the brink, and a number of analysts see the United States at real risk of contraction in the first half of 2001. The two powerhouses together comprise more than 40 percent of world output. Add mounting troubles in Asian nations reliant on Japanese and U.S. export markets and investment capital, and some 55 percent of the world economy is in the doldrums. Europe is in better health, but is starting to stumble and looks an unlikely candidate to do the world's heavy lifting. ``What happens in synchronous downturns is they tend to be long and deeper because there is no locomotive to pull anyone out of it,'' said Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York. Fed Looks Overseas The U.S. Federal Reserve (news - web sites), which cut interest rates three times this year to cope with an industrial slump and sagging consumer confidence, this week warned of external risks to U.S. growth for the first time since the 1998 Russian financial crisis threatened a global credit crunch. The irony is that America is to a large degree importing weakness which it exported overseas in the first place. ``I think a good share of the worldwide economic slowdown is originating here,'' said Princeton University economist Alan Blinder, a former Fed vice-chairman. Japan, the world's second largest economy, is struggling with self-inficted problems of deflation, massive public sector debt, and a banking sector saddled with bad loans which foreign investors fear could destabilize global financial markets. But the Bank of Japan, which this week drove short-term interest rates to zero, said this week slumping exports and sickly stock markets had now choked off the country's tepid economic recovery. European Central Bank Chief Economist Otmar Issing on Thursday reversed months of upbeat ECB comments that the euro zone was sufficiently independent of exports to weather the troubles brewing overseas. Issing said the central bank would revise down its forecasts for euro zone growth of nearly 3 percent this year due to a significant worsening in the world environment. Analysts now look for the ECB to lower interest rates soon. ``Everywhere you look, the U.S. locomotive has developed engine trouble, and the rest of the world is already feeling it,'' said Roger Kubarych, senior fellow for international economics at the Council on Foreign Relations. The risk is that international developments could feed into a vicious cycle. For example, Kubarych said that while a weakening Japanese yen could alleviate deflation problems and help Japan's exporters, it would likely pressure other Asian currencies as well, piling pain on already ailing U.S. industry. ``It's a pretty nasty situation,'' Kubarych said. Emerging Crises Financial turbulence in large emerging market countries have revived bitter memories of the global market contagion sparked by Asian and Russian crises in the late 1990's. Turkey roiled world markets last month when it was forced to devalue its lira currency, in effect scuppering an International Monetary Fund disinflation plan. A financial and political storm in Argentina is sending shockwaves through markets in Brazil, highlighting the indebted Latin American giants' dependency on international borrowing. While these strains have yet to touch off global contagion, a deep U.S. slowdown could turn today's problems into tomorrow's crisis. ``We are only in the second inning here. It is a long game. If the U.S. economy stays sloppy for the rest of this year or if there is a 'false dawn' recovery, you don't think there is going to be a hit on other countries?'' Kubarych said. --- Sec. 107. 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