Economy - Terrorism will hit efforts for recovery, experts say
By BRUCE LITTLE, The Globe and Mail
Wednesday, September 12, 2001
If there was anything a struggling economy - quite aside from an entire country - did not need, it was the kind of horrific attacks the United States suffered Tuesday.
Among economists who tried to make a first stab at assessing the economic impact of Tuesday's terror, there was a quick consensus that the U.S. economy probably will have even more trouble throwing off its recent woes and getting back on a track of faster growth.
"We were coming into fall in a very nervous environment, with cracks appearing in consumer confidence," said Warren Jestin, chief economist at Bank of Nova Scotia. "This can do nothing but further undermine confidence."
Some analysts in Europe and the United States said the attacks in New York and Washington would tip the U.S. economy from its severe slowdown into a full recession.
"There is no economic good that comes out of this. It is just a question of how bad will it be," said Mark Zandi, chief economist at Economy.com. "It is now likely we will get a [contraction in the economy in] the third quarter, given all of the economic disruptions that this is creating with a shutdown of the transportation system and the financial markets."
Others, who although they saw nothing but bad economic implications in Tuesday's horror, were more chary of jumping to such conclusions.
Mr. Jestin said the U.S. economy was already about as close to zero growth as it could get before the attacks. "The second half of the year will be exceptionally weak, but it may not be an actual recession," he said.
Tuesday's stock-market plunges in Europe after the attacks were "very clearly an initial reaction," but markets are likely to remain volatile for some time yet, he said. The added uncertainty means that consumers "will have an added layer of caution built into their psyches."
In the past year, the U.S. economy slowed to a meagre expansionary pace of only 0.4 per cent in the second quarter from the growth rates of more than 4 per cent annually that it enjoyed from 1997 to 2000.
Canada, whose economy is closely linked with that of the United States, has followed much the same path, decelerating to a growth rate of only 0.4 per cent in the second quarter from 4.4 per cent in 2000.
David Rosenberg, chief economist at Merrill Lynch Canada Inc., said the terrorist attacks were "obviously a negative, but what more can you possibly say? I don't know what any economist or financial-market analyst could offer beyond the obvious - it unleashes a whole new element of uncertainty to the equation."
Rick Egelton, deputy chief economist at Bank of Montreal, said it was difficult to make a direct link between something as unprecedented as Tuesday's attacks and the path of the U.S. economy over the next few months. Americans' broad sense of security may be shaken, he said, but "it's hard to imagine that people would spend less than they would otherwise spend."
Lew Johnson, a professor of finance at Queen's University in Kingston, Ont., said uncertainty will affect capital markets and consumers, "but in terms of the specific events Wednesday triggering a recession, I don't see that happening.
"To be a bit cold about it, markets love a good war," he added, noting that the Second World War dragged the economy out of a depression. "So a war-time economy is great for the economy, great for the markets and great for industry."
However, more pessimistic assessments were the norm Tuesday. In London, Charles Dumas and Tim Congdon of Lombard Street Research Ltd. said in a commentary for clients that the attacks have reduced the likelihood that the U.S. economy will soon bounce back from its slowdown.
"A sharp downward move in stock prices, plus general public insecurity, is likely to shift savings up and consumer spending down. This could remove the chief potential source of U.S. recovery, reinforcing the already severe cuts in business spending."
Economists had trouble coming up with useful comparisons that would guide their analysis, but Sung Won Sohn, chief economist at Wells Fargo and Co. in Minneapolis, recalled the negative economic impact of the 1990 Persian Gulf war. "Certainly in 1990, the economy went into a recession," he said. "Consumer confidence plunged because of the war."
Some analysts found Tuesday's tragic events so horrific that they simply did not want to talk about the economic implications.
"It's a bit indecent to be raising the question right now," said Jim Frank, chief economist at the Conference Board of Canada. "Somebody just declared war on the United States."
In Valhalla, N.Y., Carl Weinberg and Ian Shepherdson of High Frequency Economics Ltd., who usually produce a daily stream of economic commentary for clients, said Tuesday that there was "no financial news that we care to discuss. What seemed important just a few hours ago now seems to be of only remote significance."
Dale Orr, managing director of the Canadian unit of DRI-WEFA Inc., said the effect on U.S. confidence may be less if the attacks turn out to have been made by domestic rather than international terrorists. If the perpetrators are in the United States, he suggested, they may be easier to find.
Robert Mundell, winner of the 1999 Nobel Prize for economics, said the attacks "will have a little effect but not a big effect" on economic growth.
Mr. Mundell, a Canadian who has spent most of his career in the United States, where he teaches at Columbia University in New York, said the effect on the U.S. economy will be minimal, "unless the terrorist attack has much deeper roots than we know. There's a sense it'll help Americans pull together a little more and not have so much factionalism in politics."
With files from reporter Caroline Alphonso and news wires.