When Terrorism Strikes, History Shows Economies Prove Resilient

Why the Markets Remain Resilient After Paris Attacks
  • Past terrorism had transitory economic effect, studies show
  • Caveat is if latest Paris attack marks start of a campaign

The French economy has history on its side.

From the attacks of September 11 to those on Spain in March 2004 and London in July 2005, industrial economies have proven more resilient to terrorism than first feared, according to those economists who have studied the links.

That may bring some reassurance to France three days after at least 129 people were killed across Paris in Europe’s worst terror attack in a decade and as its economy continues to record lackluster expansion.

“A diversified economy like France will experience no adverse influence from the attack whatsoever,” Todd Sandler, who teaches at the University of Texas at Dallas and co-authored a book and papers on the economic impact of terrorism, said in an e-mail. “Many statistical analyses would back up this.”

Research published in 2004 found that in 177 incidents from 1966 to 2000, per capita gross domestic product growth fell afterward by an average of just 0.048 percent on an annual basis.

As for September 11, a report co-authored by Sandler for the International Monetary Fund this year estimated losses of less than 0.1 percent of the U.S. economy.

Meantime, Spain’s 3.6 percent expansion in the second and third quarters of 2004 was slightly faster than the prior six months and consumer confidence continued to advance, according to JPMorgan Chase & Co. economists Malcolm Barr and David Mackie.

Confidence Dip

In the U.K., private consumption grew at a 3.5 percent pace during the second half of 2005 and the economy expanded 5 percent, faster than the rate of the two quarters prior to the attack, Barr and Mackie said in a report to clients on Monday.

Such case studies suggest that while specific industries such as tourism, insurance or airlines suffer following attacks and household and company confidence dip, the broader economic impact is often transitory.

Investment or retail spending is sometimes just delayed or refocused. For example, economists at Goldman Sachs Group Inc. said in a report on Sunday that French consumers may switch to buying more “home-based” entertainment.

What is lost is also often made up for by more government spending or cushioned by monetary stimulus such as that delivered by the Federal Reserve in September 2001. The European Central Bank is now even more likely to increase quantitative easing when its officials meet next month, said Simon Derrick, chief markets strategist at Bank of New York Mellon Corp.

“Terrorists who want to disrupt modern economies have a more difficult task than is widely assumed,” said Adam Klein, a visiting fellow at the Washington-based Center for a New American Security. “An open, interdependent, highly-networked economy creates vulnerability, but it’s an even bigger advantage in terms of resiliency.”

Broader Campaign

The type of attack witnessed in Paris also may mean less of an broader economic impact, said Walter Enders, who teaches economics at the Culverhouse College of Commerce & Business Administration and has also written on how terrorism affects economies.

“These are attacks against people and places, not iconic symbols such as the Eiffel Tower,” he said. “It’s a different type of attack and not looking to damage property or disrupt economic activity. So the economic costs are not so great.”

The caveat is that Friday doesn’t mark the start of a campaign. After the outbreak of terrorism in the Basque region in Spain in the late 1960s, per capita GDP fell about 10 percentage points more than it otherwise might have, according to research in 2003.

“Sporadic attacks don’t alter macroeconomic trendlines, but frequent attacks, over the long term, probably would significantly depress consumer expectations and business investment,” said Klein. “An attack with weapons of mass destruction, or even a radiological dirty bomb in a major urban area, would be uncharted territory and could fundamentally alter our way of life.”

For now, Erik Nielsen, head of economics at UniCredit Bank AG, is betting history is repeated.

“There is no way that the fundamentals will change to an extent that would derail the recovery and fair value of global assets won’t have changed because of these mad people’s act,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE