Fears of further economic slowdown

It will cost an additional $7 million each month for extra police on London's streets

By CNN's Tom Bogdanowicz

LONDON, England (CNN) -- The world economy was slowing before last week's terror attacks. Now there are fears of a further dip in economic activity.

The fallout from the attacks in New York and Washington is spreading:

* Extra police on London's streets will cost $7 million every month.

* Fewer passengers and increased security have airlines and aerospace firms laying off staff and looking for government support.

* Military action could add billions of dollars to governments' defence spending.

* Consumer confidence may crumble as unemployment fears rise.

Interest rates have been cut, but any economic benefit may not come through for months. Economists fear the biggest financial impact will be a further slowdown in economies as consumers spend less and investment is put on hold.

"We already had a very weak U.S. economy and Japan in recession and Europe with hardly any growth, so the risk is it tips us over the edge into global recession because it's going to damage confidence everywhere," says Paul Mortimer-Lee of BMP Paribas.

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So at exactly the same time as governments are spending more on policing, assistance to businesses or possible military action, they may be hit by the consequences of an economic downturn.

"Tax revenues are going to be lower. Fewer people will have jobs, fewer people will pay income tax, more people get unemployment benefits, so government spending goes up," says Paul Donovan of UBS Warburg.

To cope with higher spending on security, the German government is increasing tobacco and insurance taxes. But there's a danger that wider tax hikes could hurt consumer confidence.

The other solution is for governments to borrow more, or in cases like Britain and the United States, use up budget surpluses.

"I believe that we are better equipped than we were 10 or 20 years ago to cope with the difficulties we face in the world economy, and the reason we are better equipped in Britain, in the (European) area and in America is that people did take time in the last few years to put us on a better footing," says Gordon Brown, British Chancellor of the Exchequer.

While there's a serous threat to worldwide economic growth over the coming months, recent interest rate cuts and higher government spending should provide a boost in the coming year.

Barring a protracted conflict, economists expect growth in the second half of 2002 to counteract any impending slowdown.