"Terrorism: The Reality of its Effects on the Economy"?

In light of recent news of continuous acts of terrorism, there is no doubt that we’re becoming increasingly aware of the threats posed by extremist groups. Countless devastating effects are already evident, but as accounts of war crimes and terrorist acts continue to transpire at an alarmingly fast rate we are faced with endless questions on what implications terrorism might have on countries across the globe. Whether terrorist attacks are local or international, they cause human, psychological and economic repercussions that vary greatly in intensity. Whilst human and psychological consequences are often the most striking, economic backlash is arguably more widely suffered on a larger and longer scale, and can also be indirectly affected by human and psychological damage.

So, this begs the question, what impact does terrorism have on the economy? The answer is not simple, and could be endlessly discussed along with more and more questions. To start us off though, let’s take a look at some discussion points to be considered.

 

Human, Psychological and Economic Implications

An immediate connection between these three areas is not always obvious, however human and psychological impacts can often have negative consequences for the economy. Human loss is clearly the most devastating and impressionable result of acts of terrorism; during the last 35 years there have been over 20,000 incidents, ranging from the 1972 hostage takeover at the Munich Olympics to more recently the murder of two US journalists and these have resulted in hundreds of thousands of casualties worldwide. In short, the more fatalities caused by a terrorist attack, the greater psychological effect it will have and this in turn creates panic, affecting consumption and investment behaviour of both individuals and companies, therefore leading to varying levels of market disruption depending on the intensity of the attack.

 

What is the resulting impact on the economy after an act of terrorism?

With multiple economies around the world, the effect on these individually can vary quite dramatically, and we cannot always be sure whether one event is solely to blame for a disruption. However, it is safe to assume that dramatic changes occurring straight after significant events are probably going to have some correlation. For example, immediately after the September 11 attacks on the World Trade Centre in 2001, the USA saw a sharp drop in demand for hotels, restaurants, and businesses in the tourism industry. According to the OECD report of 2002, the economic cost directly after this incident alone amounted to over $40 billion USD, with further loss as the economy began to improve again.

During these times there is an overwhelming sense of uncertainty, causing investors to become more risk averse and liquidity within markets is reduced. For foreign exchange this can mean a number of knock-on effects, including much wider spreads and increased volatility.

 

How does the economy recover following a terrorist event?

In order to achieve an economic recovery from such events, it is vital to address key areas of uncertainty. Firstly it is necessary to identify whether an event was just one, isolated attack, or if there be more. Furthermore, will it escalate into something bigger and long lasting, such as war? As we’ve already identified, psychological damage is costly to the economy and needs to be repaired quickly to encourage a fast recovery. Therefore, changes in policy and reinforcement of security provide reassurance and comfort to consumers and companies. Although this is costly in itself, the desired long-term effect is much more achievable this way.

Both short, medium and long-term implications are created by terrorism, and with each case differing greatly in terms of effect both locally and globally it is not easy to define how simple and fast an economic recovery can be. However, what we can do is look at previous examples of terrorism and the effects these have had on the countries concerned. For example, 9/11 has proven that whilst terrorist attacks lead to devastating effects on the economy, recovery is possible, and more quickly than you’d think. Furthermore, like with all trades in Forex, we are able to have some degree of awareness of currency direction with the aid of fundamental analysis. Economies fall and rise due to countless reasons, and fortunately, this is arguably one that is more predictable than not. Therefore, the moral of the story is not to draw back in fear, but to simply exercise a little caution and be sensible with trades.

comments powered by Disqus

Trader Stories

Latest Interviews

Statement on CHF market volatility

Business as usual for MahiFX despite Swiss franc movement

Full Interview

MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such. Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. MahiFX’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.