There is a consensus view emerging that the economic impact of last Thursday’s terrorist attack will be minimal. I beg to disagree: it *may* not be. The reasoning behind this is economic not WoT/political. The apparent stylised fact we are being offered is that “a look at previous terrorist attacks… suggests that any impact on the economy tends to be small and short-lived”. We are dealing with a class of incidents basically containing two prior members: New York, and Madrid. Now circumstances alter cases. No one will deny that these attacks constitute a *potential* shock to the economic system. The stock market impact is not the important one (this may well be described as ‘bounce’), the really important issue is consumer confidence. Now the US was in September 2001 bottoming out of a recession (the NBER officially declared the recession over in November 2001). Spain was in the middle of an ongoing housing driven boom of some magnitude, and this had sufficient momentum not to be driven off course. But the UK is on the edge of a possible precipice, one good shove can push it over, the risks here are much higher.
The starting point for a consideration of the issues raised would be Paul Krugman’s 2001 article: The Fear Economy. Let me be clear, I am not saying that anything is, or is not going to happen. I am saying that the risks of an economic consequence this time are greater. A lot depends on how quickly the culprits are caught, and how convincingly the ‘forces of order’ can persuade people that the situation is under control.
” But the UK is on the edge of a possible precipice, one good shove can push it over, the risks here are much higher.”
i really do not understand your pessimism, i do not get the point why british confidence would be at danger :
– none of the economic strategic point were affected
– The gouvernment seems to lead effectively the country, there is no lack of leadership
– UK is an Island but economy is globalized
Thing would be different with coordonated attack on the City, at Frankfurt and Paris, Eurotunnel and Plane. The Whole european economy would be at risk and of course UK’s as weel.
IMO, we are really far from this kind of highly sofiticated threat but can happen on day of course with a motivated group as the one that down the towers.
i really do not understand your pessimism, i do not get the point why british confidence would be at danger :
– none of the economic strategic point were affected
Why? To be blunt, the London subway is the most crucial equipment in the UK.
You can blow up a school, a shopping mall or the people in an airport. You will kill a lot of people. But London has a lot of malls, schools and even several airports. Close the Chunnel and people will take hovercrafts. Close the tube and people will ride … what?
All the will to endure will not allow you to use a tunnel with a burned subway car stuck in it. The IRA, Eta or RAF never crossed that line. I am afraid that this time the terrorists have shown that they can turn the heat up to a point where it becomes physically impossible not to resort to the restrictive measures they want us to use.
I lived at Paris and had to take the subway ( St Michel station, and i was in the subway when the explosion occured, fortunatly not at the station yet !!!) everyday when we had the string of bombing, i do not remember any economical effects of theses attacks, and it is dubious that the Tube is more important than the Parisian metro, from an economical point of view.
I do not think that the economy is so fragile.
But at Paris we use to deal with the lack of subway : subway’employees are sometime in Strike 😉
“i really do not understand your pessimism”
I’m not being pessimistic, Fredouil, nor optimistic, I’m just trying to be prudent. The ‘precipice’ I refer to has nothing to do with terrorism or with which part of the infrastructure was hit. It has to do with the housing bubble, and whether the UK faces a soft or hard landing. In the less favourable case scenario this attack can make the difference between a soft and a hard landing. This is an economic situation which was already known about and studied. Opinion had been divided, but this could just swing the difference. If so it would then have implications for the US housing position. Again, it depends whether you believe in butterflies.
I link the Krugman article since the issue is Irving Fisher style debt deflation following the bursting of a bubble. History has shown us that the US was over the worst of the internet bust by the time 11 September happened (thank god). We still don’t know where we are with the UK which is why prudence is warranted. The consumer confidence indexes need to be carefully followed. Interest rates need to be adjusted rapidly and appropriately (there was a rumour that the BoE would hold an emergency meeting of the monetary policy committee. this did not happen, since I guess they thought that anything which might be seen as a panic move would be counterproductive. The economic arguments for a rate cut are now pretty compelling). The trick is to keep ahead of the psychological curve. The first reaction is anger and bravado (and a maintenance of normality). The second reaction can be depression and pessimism (this is the dangerous one). Then will come reconciliation and positive thinking. The important thing is the time scale.
Einstein famously said that god doesn’t play dice with the universe, however chance events may influence history. Using jargon, it all depends whether the processes are path dependent or not. Lets just hope they catch those guys quickly.
Unlikely, the economy in Israel has simply continued despite a string of suicide attacks on the transport system. What will happen is that a security premium is factored into the markets and you may have to a pay a bit extra for certain services (like the transport sector).
Nouriel Roubini has a bunch of stuff on these issues, both on his blog and his fuller research and analysis website.
Thanks for the links P O’Neill. Here’s a first temerature reading. The initial shock to retail sales has little importance. It is the impact on tourism and consumer confidence over the next two or three months that could be important in my view.
israel doens’t seem a good example that economy is propped up entirely by the U.S. dollars pumped into it…