UBS Warburg Asia chief economist Arup Raha expects the shattering of consumer hopes of global economic recovery in the wake of terrorist attacks in the United States to create added economic fall-out. 'Since the disaster, what really has changed is that it's now quite clear the US is going into a recession, largely because the consumer is going to capitulate,' Mr Raha said. As a result there would be a further dampening of consumer sentiment in the US and Asia and less demand for Asian exports. Before the attacks, Asian interest-rate cuts had been supporting consumer balance sheets through lower credit card and mortgage payments. 'Even though consumption was moderating in Asia, there wasn't a meaningful change in consumer behaviour because people were able to look through the downturn,' Mr Raha said. 'Their income expectations were higher and their unemployment expectations lower. Those expectations have changed.' A collapse in consumer sentiment in the US and Asia would also affect the 'potency' of monetary policy. Mr Raha said that for more than a year UBS Warburg had been questioning the ability of monetary policy to affect business investment or capital expenditure in the US. 'We always said monetary policy was not going to be able to affect business investment in a big way because the problem [in Asia] was over-capacity, and a lack of corporate credit worthiness. So what was getting boosted was the part going to the consumer,' he said. 'Now it's one story for monetary policy to be supporting consumption when there are expectations of income growth down the road. It's another thing for monetary policy to try to revive consumption after it has fallen. Because now people really need to see income growth coming in. And that is unlikely in the medium term.' The bank saw the US slow-down before the attacks as a protracted investment downturn rather than a typical five-year business cycle: 'This is the first time since 1973/74 that the developed world is contracting together.' Asian consumers would take on new importance in Asia's economic recovery - likely to appear slowly in the second half of next year - because traditional Asian growth drivers of investment and exports had collapsed. Mr Raha also warned the rebound would only be modest. Real wages were likely to decline. He expected Hong Kong's economy would contract by 0.7 per cent, revised downward from zero per cent. The downgrade for next year was more dramatic - to a modest 0.4 per cent from an initial growth forecast of 4.5 per cent 'The impact we expected real interest rates to have on the economy is now going to be a lot more muted because expectations of a recovery are being postponed,' he said. The bank downgraded this year's Asia forecast, excluding China and Japan, to 2.3 per cent, down from 3.1 per cent. While next year it was looking at 2.4, down from 5.3 per cent. 'These forecasts cannot be made with the greatest of conviction right now,' he warned. Asian economies could eventually benefit as the fallout accelerated out-sourcing to lower-cost countries, he said.