Editorial: Shockwave may be economic catharsis

The New York Stock Exchange, nerve centre of the international economy, could hardly fail to suffer fallout from the assault on the United States. For one thing, Wall St used to look up to the World Trade Center. More important, the American economy was riding close to the wind of recession before the events of last Wednesday.

When hijackers aimed airliners at the financial district of lower Manhattan they would have intended to hurt many more people through the economy than would die or lose loved ones in the destruction.

The killers might have succeeded with the economy, too. When Wall St reopened for trading yesterday, the blue chip index, the Dow Jones industrials, closed more than 7 per cent lower, its largest points loss in a single day. It might have been worse, but not much. Any more than 8 per cent would have been considered a calamity.

While the first day's trading after nearly a week was bound to release pent-up pressure, up or down, the stockmarkets will be delicate for days, even weeks, to come.

All instinct says the shock of an unprecedented aerial attack on the US mainland will have an impact on economic activity and consumer confidence. No corner of American life can be untouched by the horror. Cultural events have been postponed; sporting contests have been half-hearted. It is not the time for marketing drives and it is unlikely that many are shopping. The economy that has defied predictions of recession for nigh on two years may now be about to succumb.

And if it does, the shockwave will be felt here. The US, Japan and Australia are New Zealand's most lucrative export markets. An American recession would not only squeeze sales there, it would worsen the recession in Japan and hit Australia, where New Zealand products could also suffer from the backlash against the Ansett collapse.

The local economy has been remarkably buoyant amid worldwide pessimism for the past year or so, but there is a new turbulence ahead. It poses a dilemma for the Reserve Bank, which has ceased lowering interest rates lately but may now need to revise its outlook.

The US Federal Reserve lowered its funds rate by 0.5 per cent ahead of Wall St's reopening and injected unusually large volumes of liquidity into the finance markets. The European Central Bank followed suit, saying events in the US were likely to weigh down on confidence in the euro currency zone, if only for a short time. The Fed and the ECB expressed faith in the underlying strength and resilience of the American economy.

By most calculations the economy may have slid into negative figures before the terrorists struck. If so, the attack might prove to be a double-edged sword. It may discourage activity for a short time, but it could also provide the means of a quick recovery. The means may be psychological and fiscal.

Psychologically, recovery may be easier and quicker when a recession is associated with a single dramatic event such as this. A slump now will seem much more explicable than the usual contractions that can occur in the course of the economic cycle.

And the fiscal means of recovery are taking shape already. The President has authorised financial assistance for airlines in the wake of the tragedy and Congress seems prepared to spend whatever it takes to repair the damage done last week and see that it cannot be repeated.

There is another consequence of the attack which should be taken into account. Americans are not just stunned and grief-stricken, they have been drawn together and they are determined that these killers, whoever they are, will not darken their lives.

They are being asked for patience as they wait for the perpetrators to be identified and punished but the mood there is far from dispirited. To the contrary, as the shock subsides and justice remains unsatisfied, the American people are quite likely to resume cultural and commercial activities with a vengeance.

Their inclination to live and consume has defied recession predictions for a long time now. Chances are they will bounce back from this blow quicker than expected. The tragedy, far from tipping the world economy into recession, could be its catharsis.