Commuters buy newspapers from at stand at Paddington Station in London
Eddie Keogh  /  Reuters
Commuters buy newspapers from at stand at Paddington Station in London July 7. But will consumers keep buying in the wake of the terrorist attacks?
By Martin Wolk
updated 7/7/2005 5:22:32 PM ET 2005-07-07T21:22:32

Thursday’s terrorist attacks on London come against the backdrop of a sluggish European economy and could have a small but measurable impact on consumer confidence and spending, economists said.

“My feeling is that (the impact) will be fairly fleeting, but the loss of confidence just adds to the list of things that is working against the European economies,” said Larry Horwitz, senior economist at Decision Economics.

Economic growth has slowed sharply in Britain and the rest of Europe over the past year for several reasons. In Britain, central bankers raised interest rates four times last year to cool a red-hot housing market and succeeded in cooling the broader economy as well, making it slightly more vulnerable to a consumer pullback, said Nariman Behravesh, chief economist for Global Insight.

“Clearly the bigger impact will be on the British economy,” Behravesh said. “(The attacks) may have a bigger impact than some people are suggesting mainly because it is occurring at a time when the economy is weak and growth is slowing. So it can be one more thing that adds to declining confidence.”

But other analysts said the U.S. experience after the attacks of 9/11 demonstrated that consumer spending can bounce back quickly and strongly, especially farther from the scene of casualties. And most experts said the London incident — presuming it is not followed by more attacks — appears to be similar in scale to last year’s attack on commuter trains in Madrid, which had a significant political impact but only minimal effect on Spain’s economy.

“Economically it is a trivial issue for the (United Kingdom),” said David Wyss, chief economist for Standard & Poor’s.  “You may see a little depression in property prices in central London as you did in New York after 9/11, but that didn’t last very long.”

Britain’s economy has expanded at a modest 2.1 percent pace over the past year, compared with 3.7 percent a year ago, although the unemployment rate is relatively healthy at about 5 percent, said Jay Bryson, global economist at Wachovia Securities. In the 12-nation euro zone, meanwhile, growth has slowed to 1.3 percent from 2.1 percent a year ago, and the jobless rate is close to 9 percent.

Both the European Central Bank and the central Bank of England held meetings Thursday after the terrorist attacks, following through with previously set schedules, and left interest rates unchanged as expected.

Bank of England officials made no comment on their decision, while ECB President Jean-Claude Trichet said there was no immediate need to provide additional credit to financial markets.

U.K. interest rate cuts ahead?
In England, where the economy is seen as relatively healthy despite the recent slowdown, analysts expect the central bank to begin cutting rates again, possibly as soon as next month. And the economy is expected to pick up momentum over the next several quarters even though consumers may cut spending over the next few weeks or months, especially on non-essential items like restaurant meals and travel.

“We still feel that these events are very much like hurricanes and earthquakes,” said Behravesh. “There usually is not a huge impact, but there is some impact. But then the economy tends to bounce back after a quarter or so.”

Major Market Indices

And some British businesses might see a temporary boost as governments and businesses boost spending on security in response to the deadliest attack on London since World War II.

In continental Europe, the economic problems are more complicated, and many analysts, at least in the United States, are growing increasingly skeptical about the ability of relatively young policy-making institutions to respond.

Growth in the euro zone, dominated by the three major economies of Germany, France and Italy, has been held back by an aging population, poor productivity growth, and structural problems including a lack of workforce flexibility, several analysts said. Legal restrictions make it difficult to hire and fire workers as needed, and the European Central Bank has been extremely reluctant to stimulate the economy by cutting interest rates.

The ECB’s main benchmark lending rate has been unchanged since early 2003.

“The contrast between the ECB’s reaction to a weak economy  and the Fed’s reaction is becoming very noticeable and frankly is causing some to question the credibility of the ECB,” said Wyss. “I don’t quite understand their reluctance to lower rates.”

Part of the problem he said, is a policy-making structure that gives a disproportionately large voice to smaller countries like Spain, Ireland and Denmark, where the economy is performing somewhat better than in the three core countries of continental Europe.

Other analysts noted that cultural and language barriers, as well as social structures, limit the mobility of the European work force and therefore prevent the type of economic integration that exists to a much larger degree in the United States.

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