Analysis: In troubled times, shopping became the new patriotism

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For the world economy this has been a year of first of fear, then of hope and then of disappointment. Now, looking forward, the prospect is for a year of huge uncertainty with a few bright spots in the distance.

For the world economy this has been a year of first of fear, then of hope and then of disappointment. Now, looking forward, the prospect is for a year of huge uncertainty with a few bright spots in the distance.

The terrorist attack struck a world economy that was already struggling. The US, which had been the great motor of growth through the second half of the 1990s, was actually already in recession during the first nine months of 2001 – though we did not know that last autumn. The fall-out from the bursting of the high-tech bubble had already savaged the financial markets and – again we did not know it at the time – was about to be further undermined by accounting failure and corporate fraud.

Though the US economy was thought to be more affected than either Europe or Japan by both the hi-tech bust and the market collapse, as things have turned out both continental Europe and Japan have fared worse than the States.

The thing that saved the American economy in the months after 11 September was the American consumer. Shopping was the new patriotism. Car sales in particular surged, with manufacturers using the very low interest rates to give free credit to buyers. Those low interest rates also supported the housing market. America has not had a home price boom quite on the scale of Britain (and of course there are even larger regional variations) but prices have in general been very strong and this has to some extent offset the fall in people's share portfolios. Indeed people who have houses in popular areas and managed to avoid the worst of the hi-tech share bust have done rather well over the past year.

In the past few months there have been some signs that the American consumer boom has eased off but it is too early to say that the consumer boom is really over. At some stage Americans will have to rebuild their savings but the rest of the world should hope that they do so slowly. The US market has been the one thing stimulating both the eurozone and Japan.

Corporate malfeasance? Well, as anyone who has visited the US recently and talked to ordinary Americans would know, there is real fury at the way too many members of the corporate elite have lined their own pockets at the expense of employees and small investors. The collapse of the markets has undoubtedly been made worse by this and this is making it harder for decent firms to re-finance themselves if they need to. But has it had a direct, identifiable impact on the economy? Maybe, but it is hard to see it.

The eurozone has been the big disappointment. In theory Europe should have done better than the States but it seems to have done worse. One big drag on the eurozone has been the reluctance of Germans to spend their euros. Retail sales there are running down more than 4 per cent year-on-year and as you can see from the graph, consumption across the eurozone has been very weak for the first half of this year.

France managed a reasonable recovery after a bad final few months of last year but consumption there is weak and in the past couple of months unemployment has started rising again. The other bog eurozone economy, Italy, has been a persistent under-performer and nothing before or after September 11 seems to have changed that.

In the past two months the eurozone performance has deteriorated further. The growth forecasts are now being revised downwards and there is a real danger of renewed recession in the worst performing eurozone member, Germany. Slow growth cuts tax revenues and both Germany and France risk breaching the 3 per cent ceiling on budget deficits under the Stability and Growth Pact. So their scope to boost their economies by greater public spending is very limited. And of course they are unable to cut interest rates because these are set by the European Central Bank. It has been calculated that the ECB interest rate at 3.25 per cent, is one percentage point too high for Germany, though it is about right for France.

Japan? The Japanese economy relies on export demand to provide growth. Its ageing population at home is not in the mood to increase its spending so the domestic economy has been just ticking over. Prices are falling so that even if there is growth in real terms there is no growth in money terms. So repaying debts becomes very difficult as deflation increases their real value every year. In good quarters there is a little growth, driven by exports, but in a bad quarter everything slips back again.

And Britain? It may to many people seem rather odd, but in purely economic terms the UK seems to be the least affected of the large countries either generally by the global downturn or more specifically by the 11 September attacks. The figures keep being revised but it looks as though Britain has kept growing, albeit slowly, through the past year. Unemployment, helped by government hiring, has been broadly stable and is currently the lowest of the Group of Seven large developed economies. Exports have held up reasonably well, though there is a current account deficit of a little over 2 per cent of GDP. And we have kept on spending – though our boom may now be easing off. Most market projections call for resumed decent growth next year.

The countries discussed above account for nearly three quarters of world output. What happens to them therefore has a huge impact on the rest of the world. There are, of course, other points of potential growth. For example the "tiger" economies of South-east Asia have put in a remarkable performance over the past 30 years, leaping from developing country status to developed in one generation – something that has never happened before in the history of humankind. China and India have giant domestic markets, large parts of which carry on unaffected by what happens in the US or Europe. As for Russia – yes, it is growing very fast but that is largely on the back of a high oil price. Insofar as anyone could gain from terrorism Russia has been one of the big gainers from those attacks.

But at the end of the day the motor for the world economy has to be either America Europe. The South-east Asian "tigers" – and increasingly China itself – depend on the West to buy their exports. One quarter of the world cannot pull the rest along.

Looking back, the terrorist attacks hit a world economy that had already turned down. In the short term that world economy managed to recover in quite good order – probably rather better than most people had expected a year ago.

But the long term may be different. It is not just that there is a bill that we all have to pay to try to protect ourselves – the cost most obviously for higher security at airports on an airline ticket. Calculations vary as to the size of this bill but it clearly is several hundred billion dollars.

This cost comes on top of other costs that the world would have to shoulder anyway. There is the long-running need to divert more resources into the care of the elderly, both in pensions and health care.

The long boom has left a residue of over-investment, much of which will have to be written off. Public-sector finances are coming under increasing pressure, with the States moving back into deficit, maybe serious deficit, and much of Europe up against its self-imposed fiscal limits. And environmental concerns will also, quite properly, raise costs in the future.

This muted outlook is reflected in the performance of share markets since 11 September last year. The six markets shown here all performed dismally, with the initial fall in the middle of last September being beaten in July. The sharpest decline has been in high-technology stocks, as reflected in the Nasdaq. Of the mainstream markets both France and Germany have done worse than Britain and America, maybe reflecting a downgrading of expectations for the eurozone as a whole. The current mood, insofar as these things mean anything, is very downbeat. It is in the nature of markets to over-react but maybe there is a bit more over-reaction in the wings.

What was always going to be a period of lower growth in living standards will be slower still. It is almost impossible to distinguish how much of this drag should be attributed to the fight against terrorism and how much to the self-inflicted wounds of 1990s excess. But the attacks have made a difficult transition even more so. We are still in the early stages of that long-term adjustment. There is a long slog ahead.