We are rising from the rubble

9/11 six months on: The economy

From an economic point of view the terrorist attacks appeared to have struck at the worst possible time: hitting the world economy just as it was already facing recession. And for several weeks that seemed to be the case.

9/11 six months on

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From an economic point of view the terrorist attacks appeared to have struck at the worst possible time: hitting the world economy just as it was already facing recession. And for several weeks that seemed to be the case.

In particular travel and tourism, which account for more than 10 per cent of world gross domestic product (GDP), were faced with a devastating decline in activity. In addition, everyone expected that consumer confidence would be shattered, and the world was relying on consumers to stop the world from plunging into recession.

Now, six months later, the picture appears more encouraging. In the short term the United States and indeed the world economy were savaged by the attacks. Growth slumped in the US in the third quarter of last year and several of the weaker economies, including Japan, Germany and Italy, have had outright recessions. But now the US economy seems to have bounced back remarkably swiftly and may well be leading the world forward again.

What seems to have happened is that the shock of the attacks has compressed the time-scale of the economic cycle. This affected both individual industries and the world economy.

If you look, for example, at the airlines, the trend towards "no frills" carriers has speeded up, with airlines such as Southwest in the US and Ryanair in Europe doing well. On the other hand carriers that were already struggling, such as Swissair, have folded.

Internationally things went down faster but then they bounced back faster too. This was particularly evident in the US, where people cut their spending but only for a few weeks. And, while they cut air travel, they spent more on buying cars. Economic policy was eased: there was a tax cut and the Federal Reserve continued cutting interest rates. In addition the US increased its spending on both domestic and external security.

As a result the US economy seems to have grown quite strongly during the final three months of 2001 but the second estimate of GDP suggested much faster growth than the first one. If confirmed, it will mean the US escaped recession on the conventional measure of two successive quarters of negative growth.

The rest of the world looks to be following the US into recovery. Europe is doing better with the rise in unemployment slowing, and industry in Germany cheering up.

The UK economy slowed to a crawl in the last three months of 2001 but is expected to have grown in the first three months of 2002. Some people are even expecting Japan to perk up – or at least not to go on down. So could it be that the economy has fought back so strongly that it has already recovered from the blow? Alan Greenspan, chairman of the US Federal Reserve, seems to think so.

Last week he told Congress that the US economy was able to recover more quickly from recessions, partly because speed of information enabled companies to adjust more swiftly than before.

However, the world economy might be recovering too quickly and the present bounce may not be sustained. There are big imbalances, particularly in the US, which have yet to be tackled. For example, US consumers are relying heavily on debt to maintain their living standards.and the stock market is predicting a speedy recovery in US company profits.

The over-riding economic lesson of the past six months is that Europe depends on the US to sustain its own growth. Many continental forecasters expected the size of the EU to allow it to carry on growing. Ironically, the EU country most exposed to the US – Britain – seems to have had the best growth performance.

So yes, it is right to applaud the resilience of the world economy. But we are only in the very early stages of a recovery that is likely at best to be quite muted and at worst might falter in the months ahead.