Headlines are always about the losers in these
circumstances. The impact on international airlines is highly visible,
though budget airlines serving specific routes are relatively unaffected;
indeed some are doing very well. Ryanair’s market value now exceeds that
of BA and Lufthansa – this is probably market over-optimism, but it is
a sign of the times. Who would have foreseen the demise of Swissair a year
ago? (No one will have been very surprised that SABENA finally went to
the wall). People will still take holidays over the next year, though they
may do so in their home country or go by car rather than flying. Hotels
serving international business travelers are already cutting their prices
– in London at least -and tourism and tourist attractions are clearly
affected. But one should be wary of assuming that this slump will continue
everywhere till the end of 2002. Certainly, there seems to be a good recovery
in the young and budget traveler segments, though this will be of little
comfort to the major airlines that need business and other premium rate
travelers to sustain their operations at a profitable level.
But it’s an ill wind that blows nobody any
good. The economic impact of increased military and security expenditure
should not be underestimated. This is not going be on anything like the
same scale as WW2, but that war laid the foundations for full employment
and US post-war prosperity. As well as the immediate replacement of equipment
and ordnance in a campaign, this war looks set to accelerate the search
for technological solutions to a different kind of campaign in inaccessible
locations. New surveillance technologies and equipment were rushed into
service, sometimes at the prototype stage. The longer-term technological
and economic impact of these is difficult to quantify but nonetheless should
not be neglected. More locally in New York and Washington, the expenditure
on clearing the debris and subsequent rebuilding represents a distinct
economic stimulus. There are also positive consequences in terms of people’s
attitude toward business. One of America’s most prominent plaintiff attorneys
has said: ‘Evil has been redefined…evil is not something that corporations
do…
We know what evil is now’.
If firms continue to defer investment decisions,
then serious economic slowdown will happen but it will not be uniform.
We seem set for a period of low inflation and low interest rates which
will encourage investment – however, this will be located in much more
conservative strategies. Countries seeking foreign direct investment will
face much more searching scrutiny of political stability as well as having
to ensure personal and business security to a rather higher level than
before. Supply chain strategies will become more conservative in terms
of locations and the extent of implementation of just-in-time strategies.
There will be increasing limits to the spread of globalization. Bigger
threats to the world may, however, reduce the impact and visibility of
opponents of globalization and economic change. This is to be very much
hoped as their cure for the world’s ills would be very damaging and this
damage would fall hardest on the weakest economies and on the poorest in
most economies.
The international response so far is encouraging;
there is a new will to push forward on a whole range of issues, the entry
of China into the WTO being a notable example. The Doha meeting started
in a mood of cautious optimism, though the atmosphere there was also rather
jittery. In the event there was progress, though some of the arm-twisting
and horse-trading suggested that we were nearly back to business as usual.
A further WTO Trade round has been assured and the dynamics of the WTO
Rounds have changed. A year ago there was a sense of the process running
out of steam with only limited commitment of the major players and widespread
backsliding on earlier commitments (less by the US than others although
Steel is raising interesting questions). The immediate impact has been
to give the Round a new sense or urgency and strengthened the resolve of
governments at Doha not only because of the global economic situation but
also as an ‘act of defiance’ against terrorism. It also strengthened
the resolve of the major players to pressurize others to deliver their
commitments. Robert Zoellick, President of ICC, said in the IHT (International
Herald Tribune, 13th September 2001) that a trade round would be ‘a signal
there is an international coalition for openness and growth…terrorists
abhor tolerance and openness’. Zoellick said that one of the five reasons
the US supports a WTO Round is ‘ America’s ability to sustain coalitions
against terrorism will depend in part on our attention to the problems
faced by our partners’ A number of partners will be expecting something
in return for their support of the coalition.
Despite the appalling success of September
11 as an act of terror, its impact may have been less than the terrorists
had planned. The World Trade Center was probably not just a symbolic target,
but one whose destruction would have a cataclysmic economic impact. In
the event, the financial firms who were hit seem to have generally had
effective disaster recovery strategies, even if they had never anticipated
a disaster on this scale. The fact that the New York market was able to
open again in a matter of days, with an initial fall in the 6-7% range,
which reflected the declines in other stock exchanges immediately after
the WTC attack, is testimony to the robustness and dispersion of both global
markets and the entities that serve and manage them. Estimates of insurance
liabilities seem to be in the $20-30bn range (though seem to be rising).
The Milken Institute put direct property losses (buildings, planes etc)
at $10-13bn, the economic costs of the death toll at about $40bn, and lost
economic output at $47bn. We are probably looking at a total one-off economic
loss, including lost output, of $100bn+, not counting any subsequent multiplier
effect. This is equivalent to taking 2 years’ worldwide sales of a company
such as Sony out at one go. We should not underestimate the further microeconomic
costs of the actions taken subsequently to increase security in air travel
and public and business building, though not all these are net costs to
an economy as a whole. This has been a significant shock to the economic
system and the resilience shown to date by markets and economies has been
striking. The significance is not so much the magnitude per se of the losses,
which are fairly small relative to US wealth and GDP, but a single shock
of this size is very unusual. The longer-term impact on business and consumer
confidence is unclear. Navarro and Spencer suggest, with caveats that the
$1.7 trillion wiped off US market capitalization after September 11 may
be the best single estimate of the discounted cost over time of the attacks.
The impact of the insurance and re-insurance
losses themselves are hard to evaluate, not least because of the uncertainties
related to the total losses and how these will be distributed amongst the
range of major insurers and re-insurers. The sums represent an enormous
transfer of assets out of the insurance industry and the flows may be significant
between economies. Clearly a lot of this will be flow from Europe to the
USA. We can also be certain that insurance costs will rise and some risks
will be explicitly excluded. The impact on shipping companies and consequently
on patterns of trade is clear, if difficult to quantify at this time, though
a war-risk additional premium on insured value is certain.
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