Five years on: Economic aftershocks
Analysis
by Steve Schifferes
Economics reporter, BBC News website

The attacks on the World Trade Center five years ago were aimed at the financial centre of the world economy.

After an initial shock, that economy proved surprisingly resilient - but the response of the authorities to the disaster ultimately exacerbated many of the economic problems facing the world.

Traders watching price movements on the NYSE
Financial markets were shaken by the attacks on the WTC

Many of the world's most important financial markets were located in or near the World Trade Centre, and the attacks disrupted the communications systems - both telephone and computer - of many Wall Street firms.

The New York Stock Exchange itself was not physically damaged, but it was forced to close until 17 September.

When it re-opened, the Dow Jones industrial average of leading shares fell by 7% - the biggest ever one-day slump - and was down 14% in a week.


Even as we fight to defeat terror, we must also fight for the values that make life worth living: for education, and health, and economic opportunity
President George W Bush, Monterrey Aid Summit, 2002

Initially, then, the concerns about the economic impact seemed justified.

The attack caused about $100bn in direct and indirect damages to New York City alone.

The cost to the economy as a whole appeared to be much higher.

Business and consumer confidence fell sharply, and the US economy - which had already entered a recession in the second quarter of 2001 - shrank further.

us economic growth


Economic confidence fell around the world. Forecasts for world growth were sharply reduced, and foreign investment worldwide plunged by half in 2001. With increased worries about terrorism, there fear was that far fewer would make use of airline travel and international shipping, causing the wheels of commerce to seize up.

Airline and insurance companies took a heavy hit.

Cutting interest rates

But many of the fears of a sharp downturn turned out to be exaggerated.

Within a year the US economy was on the path to recovery.


ground zero
The terrorist attacks pushed a weak economy over the edge into a contraction
Economic Report to the President, 2002

Much of the credit for keeping the financial markets functioning, and for the economy's consequent rally, belongs to the rapid response orchestrated by the US central bank, the Federal Reserve.

On the day of the attack, the Federal Reserve moved quickly to ensure there was no financial disruption.

It announced that it stood ready to furnish any financial institution in short-term difficulties with enough cash at hand to carry on trading, injecting more than $10bn a day into the financial system.

See how Fed interest rates moved

"The bottlenecks in the pipeline became so severe that the Federal Reserve stepped in to ensure that the financial system remained adequately liquid," Fed vice-chairman Roger Ferguson explained later.

As soon as financial markets reopened, the Fed cut interest rates by half a percentage point. Before the end of 2001 two further cuts of a similar magnitude followed. Yet more cuts took rates down to a 50-year low of 1% by 2003.

The move helped stabilise the stock market, which was still recovering from the dotcom crash of 2000.

It also launched a housing boom.

Meanwhile, the tax cuts the Bush administration had managed to get through Congress in June 2001 added further stimulus, reinforced by a further round of tax breaks in 2003.

By 2004, it appeared that economic growth was strong again - although the benefits in the form of lower unemployment and higher real wages were slow to follow.

Mounting costs

In the debit column, though, the terrorist attacks meant a sharp rise in federal government spending: both on the wars in Afghanistan and then in Iraq, and on increased domestic spending on anti-terrorism measures such as improved airline screening.

us budget deficit

Overall, the US defence budget doubled, and domestic anti-terrorism spending tripled.

For both political and economic reasons, however, the Bush administration was unwilling to finance the increased costs of terrorism through tax increases.

Instead, the White House relied on increased federal debt, pushing the budget from surplus in 2000 to a huge deficit by 2003.



Even though the economic recovery has led to higher tax revenues, most experts believe there is little chance of returning to a budget surplus by the end of the decade.

There have been two other - unintended - consequences of the US economy's rapid expansion.

Oil and gas equipment in Bahrain
Oil prices soared as Middle East tensions mounted

The engine of the recovery came in the form of consumer spending, and much of that spending was on imported goods.

The world economy was the beneficiary as demand for exports grew. But at home in the US, the spending on imports meant a huge and growing trade deficit with the rest of the world, now running at almost $700bn a year.

This may be unsustainable, and could ultimately lead to a sharp depreciation of the dollar.

And the uncertain progress of the war on terror in the Middle East, combined with strong worldwide economic growth, has boosted the price of oil.

The soaring cost of energy has weighed heavily on the economic recovery, particularly in developing countries without oil of their own, and has exacerbated global financial imbalances.

International activism

Besides their effect on the domestic US economy, the events of 9/11 have had a marked impact on the Bush administration's attitude to international economic cooperation.

In the early months of his presidency, Mr Bush's foreign policy priority had been the development of closer relations with Latin America through a free trade zone.

But as the US Under-Secretary of the Treasury for International Affairs John Taylor said in November 2001: "The goals of international economic policy have expanded since 11 September."

Among those goals was the desire to demonstrate to people in developing countries that the US, and its allies, wanted to pass on the benefits of economic development to all.

The result was a decision to push hard for a revival of world trade talks, stillborn after anti-globalisation protests in Seattle in 1999.

At a meeting in Doha in the Arab state of Qatar in November 2001, just two months after the attacks, trade ministers agreed to launch a new trade round - the Doha Development Round - with the aim of freeing up trade in agricultural goods.

A few months later, in Monterrey in Mexico, the US pledged to double the amount of foreign aid and to mount a major effort to tackle HIV/Aids.

He told the conference that "even as we fight to defeat terror, we must also fight for the values that make life worth living: for education, and health, and economic opportunity...By offering hope where there is none, by relieving suffering and hunger where there is too much, we will make the world not only safer, but better."

And the US showed a renewed interest in co-ordinating international economic policy to prevent a global economic slowdown, as well as working together to combat terrorist finance.

However, it has proved far easier to launch such initiatives than to bring them to a successful fruition.

Certainly international co-operation on terrorist finance - and, to an extent, on other forms of financial crime - has improved.

But the world trade talks are now suspended after four years of difficult negotiations.

Stringent conditions attached to much of the promised US aid means most of it has yet to materialise, despite the renewed promises made to Africa at the G8 summit in 2005.

It has proved difficult to revive the spirit of international economic cooperation - particularly when much of the adjustment might have to be done by the US.



Story from BBC