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World Can Absorb Jolt from London Blasts
2005-7-8 17:02:03      Reuters
The shock of Thursday's London blasts may jar confidence in the world economy.

But analysts say the experience of similar events in United States and Spain suggests the economic fallout will be fleeting.

The death and damage caused by a series of explosions on the British capital's transport system, which security experts said bore the hallmarks of an al Qaeda attack, initially sent stock markets and oil prices sliding and lifted safe-haven bonds.

But market reaction was relatively contained and partly reversed within hours as economists stressed the resilience of economies to both the September 11, 2001 attacks on the United States and the March 11, 2004 Madrid attacks.

Even though these events jolted both consumer and business confidence -- with sectors such as transport and tourism disproportionately shaken -- households were not cowed into protracted bouts of thrift.

In addition, any decline in oil prices or long-term interest rates tended to cushion the effect on the real economy from stock market drops or early dents to consumer confidence.

"The day after any such event, people wake up and ask 'What do I do now?' and in the majority of recent cases, they continue going about their daily lives," said David Kelly, economic adviser at Putnam Investments in Boston.

"If you look at the data, the U.S. economy actually came out of recession after 9/11," he said. "The fourth quarter of 2001 was the strongest quarter for consumer spending growth in the last 15 years."

Economists note the U.S. savings rate -- the amount of monthly income households save -- rose by only a couple of tenths of a percentage point the month after 9/11.

MARKETS CALM

Markets already seem mindful of this.

In the month after the 2001 attacks on the United States, Brent crude oil futures fell 27 percent and 10-year Treasury yields dropped about a third of a percentage point.

Since Wednesday, Brent has fallen about 2 percent from record peaks above $60 per barrel and Treasury yields are down about 6 basis points.

World stock indices slid about 11 percent in the two weeks after 9/11. Over the past 24 hours, they are down less than 1 percent.

The world's top central bankers -- who have the power to change the cost of credit in minutes -- stayed in close touch following Thursday's London blasts, according to European Central Bank President Jean-Claude Trichet.

Economists said the bankers' decision not to react immediately reinforces a belief that markets are essentially calm and the economic repercussions will likely be limited.

Londoners' long history of coping with periodic bomb attacks from Irish republican groups may also help buffer the local and regional shock.

Britain is the world's fourth-largest economy, measured on current exchange rates, and London is one of the world's biggest financial centers.

David Hensley, economist at JP Morgan in New York, stressed the limited economic toll of 9/11 and said the world economy was then much weaker than it is now.

"After 9/11, the anecdotal surveys of consumer and business sentiment were hit pretty hard. But the damage was pretty fleeting and most of these reversed within a month or two," he said.

"The heartening lesson to learn from these tragedies is that people are resilient, economies are resilient and tend to bounce back -- as painful and sad as it is."

Economists at Goldman Sachs said in a note to clients that it was hard to draw conclusions in the middle of such tragic events but said more factors would have to come into play for there to be a lasting economic impact.

Those factors include further terrorist attacks in the next few days, signs of "notable deterioration" in consumer spending and a "major shift" from central banks on policy priorities. The economists said the event appeared more akin to last year's Madrid bombings than the 9/11 attacks.

The impact on the Spanish economy from the train bombs, which killed 191 people, was very slight.

The Bank of Spain said there was no significant effect on the economic growth rate from the 2004 attacks and the impact on tourism was temporary.

It estimated in June last year that the direct cost from compensation, hospital expenses and infrastructure repair were "a few hundredths of a percent" of national output.

However, British economists said a recent deterioration in UK consumer spending and confidence may be exacerbated by the attacks.

"There is a chance that the impact of this tragedy may be a little larger than would otherwise be the case," said Nariman Behravesh, chief economist at Global Insight.

However, he added: "The impact of terrorist attacks on growth is very similar to that of hurricanes, earthquakes and other natural disasters ... Growth is pushed down briefly -- 0.1 percent to 0.2 percent in the quarter in which the incident occurs -- and then bounces back in the subsequent quarter."

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(Photo source: Reuters/AFP)


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