Will London's economy ride out the bombings or does recession loom?

The economy appears to be on a knife-edge after the twin bombings in London. Shopper numbers fell sharply, but have rebounded. Leisure firms report a similar recovery but are worried about the autumn. Is this a story of resilience or recession?

FootFall, the retail analysts said the number of shoppers in central London suffered a fresh fall after the second terrorist attack, it emerged yesterday. But it was offset by a rise in activity in the outer metropolis and the rest of the UK, according to figures offering fresh evidence of resilience among consumers.

FootFall said shopper numbers last week were down 10 per cent on the previous week. "Shoppers are showing caution about coming into the city," said David Smyth, FootFall's planning director. "This is having a real effect on retailers and the economy. People are unsure of their safety so are choosing to stay away." According to retail tracking agency SPSL, the number of shoppers on the streets within the capital's congestion zone on Friday 22 July was 19 per cent lower than a year ago and 22 per cent down on the Saturday.

But its figures showed visitor numbers in Greater London were up 2.5 per cent on the previous week and 0.5 per cent on a year ago. In the UK as a whole shopper numbers were up 4.4 per cent on the previous week.

"This can only mean shopping habits have been changed," Mr Smyth said. "Consumers are still out and about shopping, in effect being displaced from central London shops to the outskirts of town."

Displacement - moving activity from one region to another - is the new buzzword among economists, retailers, tourist chiefs and even estate agents. In other words, outer London businesses involved in other types of activity might be benefiting from pain being felt in the centre.

Ian McCafferty, the CBI's chief economic adviser, said: "The evidence we have from 9/11 and Madrid [bombings in 2004] suggests the impact on the economy tends to be limited. There will be cost to retailing in central London but offsetting that will be displaced activity.

"While people are not happy to spend on travel or eating out they transfer that money towards nesting behaviour." In other words what is bad news for the restaurateur and the retailers is good news for the local builder. "We are not particularly concerned or worried that this will mark a sea change in economic activity," he said.

This sanguine attitude was reflected across central London. "We have not noticed any particular downfall," said Pam Carter, a spokeswoman for the Savoy Hotel on the Strand. Hilton, the hotel group, said there was no evidence of any cancellations following the second attack.

The stock market has so far shrugged off the impact of the bombings. While share prices of retail and leisure companies both dipped on the days of the attacked they have since rebounded and - in the case of retailers - has surpassed its pre-7 July level, the date of the first London attacks.

This classic V-shape recovery, which was witnessed after 9/11 and Madrid, was mirrored in a survey of retailers and leisure operators by The Independent. Claridges said there had been "no drop-off" in trade while Harrods said an initial downturn had been reversed. "We are encouraged by the defiance of our customers are showing," a spokesman said.

Starwood Hotels, which owns properties in London and Madrid, said in both cities there had been a short-term slowdown followed by a gradual a return to normal. The Victoria & Albert Museum said visitor numbers actually rose after the failed bombing of 21 July.

British Airways and Ryanair reported a fall in new bookings immediately after 7 July but both agreed sales had picked up since. "We are now back to where we would expect to be," a BA spokesman said.

The focus of concern is now tourism. Last week an emergency response group set up by the industry warned the bombs would lead to a drop in income from tourists of 2 per cent, or £300m. Of this £150m would be lost in London, the Tourism Industry Emergency Response (TIER) group said. The head of the leading hospitality industry group said hoteliers were braced for a wave of cancellations for the key autumn season. "By the middle of last week we were almost back to normal after 7 July," said Bob Cotton, the chief executive of the British Hospitality Association (BHA).

But he said there had been a major "change in the dynamics" after the 21 July attacks. "I think businesses looked on one incident as one incident, but two and they are starting to think this is a campaign," he said.

So far there was little sign of cancellations of holidays in August from the US, Japan and Australia that had been booked several weeks ago. "These people have made the commitment and they have not deemed the incident to be that bad it requires cancellation," Mr Cotton said. But he said hotels were "more nervous" about bookings for September and October, which overseas holiday makers would be making now.

"For many parts of the industry the autumn is the most important because it is full business at full rate so in profit terms autumn is a very key part of the business," he said. "It determines whether they have had a good or mediocre year."

Natasha Woollard, the spokeswoman for the Tower of London, agreed. "The real impact on visitor figures is most likely to be seen not in the current figures but in the autumn and Christmas," she said.

There was mixed evidence from the housing market, which like the high street was already in the grips of a slowdown before the eight bombers struck. Allyson McDaid, the owner of the London franchise of County Homesearch, a home-finding agency, said the attacks could put off buyers from the US and Far East. "If something like this happens every other week I think it will begin to affect the market," she said.

But Jim Buckle at Propertyfinder, an estate agents' website, doubted the events would have any lasting effect on London's property market. "Londoners, unlike New Yorkers, lived through many years of IRA terror and the housing market continued to function normally," he said.

One agency even claimed to have spotted a boom in central London. Russell Jervis, the managing director of Spicerhaart, said its offices in areas such as Clerkenwell, which borders the Square Mile, had seen increased activity with 5 per cent more enquiries in the past two weeks.

One glimmer of hope is that the latest knock to the economy has made a cut in interest rates next week a near certainty. Traders in the City expect at least two more rate cuts after that. The economy is growing at 1.7 per cent a year - the slowest since it was emerging from recession 12 years ago.

Alan Castle, Lehman Brothers' UK economist, said Friday's figures on consumer confidence would contain the first real evidence of any impact. "Spanish consumer-confidence data after the Madrid bombings ... suggests that the negative effect from greater concern about public safety may not be large," he said.

Additional research by Mark Dearn