Instead of feared 9/11 bust, biggest boom since 1970s

As economists stared aghast at TV images of the wreckage of New York's World Trade Centre towers after the attacks of September 11, 2001, it was hard to imagine that the world was about to embark on its biggest boom for a generation.

However, five years later it now looks clear that a global economic collapse was the dog that did not bark.

We now know that the US economy went into recession in March of that year but had emerged from the worst by the time the plane terror struck on that bright, sunny morning.

Certainly at the time many forecasters quite naturally worried that the events of 9/11, as it quickly became known, would deliver a shock to the US economy that would reverberate around the world.

Trade would collapse, airline travel would become extinct and unemployment would jump as businesses found demand shrinking and their cost bill for security and associated services mushrooming.

In fact, the world economy has grown above 4 per cent in each of the past three years and is forecast to do so again this year - the first time that would have happened since the early 1970s, before the oil price shock.

Stephen King, managing director of economics at HSBC, the global investment bank, said: "People at the time misinterpreted the impact of 9/11 because they saw this as the trigger for the recession."

In fact the events of 9/11 and the unity that it engendered across the US political landscape gave support to the massive cuts in interest rates and taxes allied with a surge in defence spending that delivered a massive cash injection into the US economy.

Foreign direct investment had already peaked in 2000 and was on a downward trend, according to figures from the Economist Intelligence Unit.

Stephen Lewis, chief economist at Insinger de Beaufort, points out that a sharp slowdown in the US economy over the coming years could be seen as a delayed consequence of 9/11.

"Generally these exogenous shocks tend to have short-term impact and after a fairly short period the effects are no longer evident," he said. "The shocks that cause damage are more endogenous ones where people make policy mistakes and impacts can run a long time, as we may be about to see."

Tony Dolphin, director of economics at Henderson Global Investors, said it was arguable that interest rates were kept too low. "Strong growth this year has led to inflation worries and pressures in some economies and you could attribute it back to that - policy was kept too easy in 2003 and 2004 - and to how slow central banks were to remove the accommodation," he said.

However, there are concerns that the train of globalisation has slowed since 2001. World trade talks that were launched in November of that year as a symbol of unity have since failed.

Economic nationalism has reared its head in both the US and Europe.

Trying to gain entry into the Land of the Free has become almost harder than breaking into Fort Knox.

At the margin, experts fear that this adds grit to the process of globalisation, adding friction to business involved in overseas trade.

Mr Lewis highlighted the visa regime in the US that has hit US universities' ability to attract high-quality graduates, who in the past have been such a valuable contributor to the technology revolution.

Mr Dolphin said it was useful to look at general happiness and well-being as well as GDP growth.

"As a result of 9/11 more resources are devoted to policing, the armed forces and fighting wars overseas rather than things that raise the wellbeing of people, whether it is building hospitals or cutting taxes," he said.

- INDEPENDENT