International financial commentators are rejoicing the fact that after
their steep fall, the Dow Jones index and the NASDAQ have recovered to
their pre-September 11 level in a month’s time. This is of significance
because it raises the question as to whether the downturn in the US and
elsewhere in the world economy, which had begun before September 11, would
also be reversed or if the performance of the US economy would not be as
poor as has been predicted by a number of analysts.
say, nothing is quite the same after the September 11 terrorist assault on
targets in the US. For quite some time to come, discussions on global and
national developments are likely to be dominated by comparative narratives
on what held before the events of that day and how things changed
thereafter. As yet, it is too early after the event to shift focus from
the scale and monstrosity of the human tragedy that occurred that day. But
as America and the world strive to return to routine, however different or
new, among the questions that linger is one on the likely impact of those
events on the global economy. Hence, though issues related to growth and
recession seem inconsequential when close to 6000 people are still
reported "missing", an assessment of the economic fall-out is called for,
even if largely speculative.
immediate economic impact derived from a range of sources, some of which
appear to be part of the design of the attack on the US. The World Trade
Centre was in itself and by location the hub of New York seen as the pivot
of world finance. Some destabilisation of the world’s financial system was
inevitable. The use of commercial aircraft as weapons of war, has obvious
implications for the viability of the airline business on both security
and profitability grounds. Disruption of communications, supplies and
business confidence were inevitable. And, if the attack succeeds in
driving the US to war, then expectations of disruption in the world
economy are likely to be realised, since the US economy has served as the
locomotive for global growth.
is the immediate consequence of a shock of this magnitude. The markets
affected first and most intensely by such uncertainty are financial
markets that are driven by whimsical sentiment and herd-like behaviour.
With financial markets closed in the US, the initial signs of this kind of
fall-out occurred elsewhere in the world. As expected, stocks of airline
and insurance companies directly affected by the crisis plunged. Financial
firms exposed to such stocks took a beating. And as equity values
collapsed, panic led to a migration of investors away from equity to debt
in capital markets and away from capital markets to commodities and gold.
Though the world had left the Gold Standard behind a long time back, the
yellow metal was once again a safe haven for the bruised investor. In the
event, a developed-country market like that in the UK had by the time of
writing recorded a fall of 12 per cent in a period of 10 days. The New
York Stock Exchange fell significantly, when it opened with a brave face
and with strong support from the government and a campaign to pump-prime
investor solidarity. And as foreign institutional investors rearranged
their portfolios through sales in emerging markets like India, the Bombay
Stock Exchange Sensex index, for example, collapsed to an 8-year low.
other immediate developments, which triggered fears that the normally
transient responses such as a fall in consumer spending in the US,
attributed by some to the fact that citizens were glued to their TV sets,
could endure in the form of depressed consumer confidence that curtails
spending and encourages saving in the wake of uncertainty. Among these
were the threats that broken transportation links could disrupt the supply
chain of businesses and drive down profitability, and that oil prices
could rise in the event of a war and trigger inflation amidst slow growth.
It must be
said that the response of the US administration and the Federal Reserve to
the shock was immediate. The Congress cleared a generous $40 billion
emergency relief package, the Fed pumped liquidity into the system to
support markets and reduced interest rates more than once, and President
Bush persuaded Congress into working out an emergency airline aid package,
consisting of $5 billion in cash aid and 10 billion in loan guarantees, to
compensate the airlines for the losses they had suffered and would suffer.
These moves make clear that neutralising the adverse impact on the US
economy of the terrorist attack, is an essential part of the war that the
US plans to wage in the days to come.
developments are of significance when the state of the US economy, the
world’s growth locomotive since the mid-1990s, just prior to the assault
on New York and Washington, is examined. The now irrelevant "Beige Book"
of the Federal Reserve that had been prepared prior to the attack, had
according to reports painted a grim picture of the economy in August and
early September. Sluggish and even declining consumer spending, softening
demand for labour and falling profits did not bode well for the future.
Moreover, the draft version of the IMF’s World Economic Outlook
which was being prepared for the now cancelled meeting of the World Bank
and the IMF had concluded that: "Over the last four quarters the major
advanced countries have for the first time since the early 1980s
experienced a broadly synchronised growth slowdown."
According to Martin Wolf of the Financial Times London, the Outlook
reported that: "In
the second quarter of 2001, global output fell. US output grew at an
annualised rate of just 0.2 per cent. So did that of the eurozone. As for
hapless Japan, it has slipped into its fourth recession in the past 10
years, with an annualised decline in output of 3.2 per cent. Among the
group of seven leading economies, the UK grew fastest, at an annual rate
of 1.3 per cent. Output declined in most of emerging east Asia in the
second quarter, the most significant exception being China. Latin
America's aggregate output also shrank, led by Brazil and Argentina."