Terrorism is one of the biggest threats facing society, and its impact extends far beyond the victims it targets. Terrorist activity elicits feelings of shock, fear and uncertainty. These feelings also extend to the economic and financial sphere, a complex global system that is often tied together by something as fragile as consumer and investor confidence. For this reason, the impact of terrorism lingers on long after an attack is carried out.
While a growing body of research seems to indicate that the financial markets have become incredibly efficient at “pricing in” unexpected violent attacks,[1] terrorism remains a real threat to the global financial system in many ways
Economic Impact
Aside from the obvious human toll, the economic impact of terrorism is perhaps the most apparent. For example, the 9/11 attack on New York City was the biggest insured event in history.[2] It also directly impacted the airline and tourism industries, and created bigger demand for security in both the public and private sectors.
To cite another example, the November 13 Paris attacks has already cost France billions of dollars in tourism revenue. This has also created a ripple effect across Europe, with many businesses expecting a difficult holiday season.[3]
The long-term or indirect impacts could be much greater in dollar terms. That’s why investors should closely monitor consumer spending and retail sales in the months following the attacks. Declines in these categories might mean a more protracted economic slowdown, especially in advanced industrialized nations that are fueled by consumer spending.
Investor Sentiment
Given that expectations drive much of the global financial markets, an unexpected terrorist strike can undo market confidence. The feelings of shock, fear and uncertainty that we described at the outset spread throughout the financial markets, creating a sharp downturn in “risky” securities, such as stocks. Investors quickly turn to safety nets to hedge against a spike in volatility.
Although investor confidence eventually recalibrates to where it was prior to the attacks, the geopolitical implications of terrorism can create a prolonged period of anxiety and fear. Less than two weeks after the Paris attacks, Brussels announced a state of emergency amid growing signs of an imminent attack.
Financial Markets
Shaky investor sentiment following a terrorist attack creates a knee-jerk reaction in the financial markets. Stocks typically drop, as investors flock to perceived safe-havens like US Treasuries, gold and currencies like the Swiss franc and US dollar. If the affected country is an oil producer or near one, the price of crude also rises on fears of a supply disruption.
The impact of terrorism on the financial markets also depends on the size, extent and location of the attack. Wide-scale attacks like 9/11 and the 2004 Madrid bombings have a bigger impact than so-called “lone wolf” attack perpetrated by one attacker.[4] Also, attacks on Western countries seem to have a much bigger impact on the major financial exchanges than other regions. For example, the recent Beirut and Mali bombings had a very minor impact on the global financial system, if at all.
Geopolitics
An often overlooked aspect of how terrorism affects the financial markets is the geopolitical response. To put it in perspective, some analysts argue that the cumulative impact of 9/11 was a staggering $3.3 trillion when you factor in the added costs of homeland security, two wars and Veterans’ care costs.[5] The prospect of war and geopolitical instability, like we’re seeing now in regards to Syria, can also threaten the financial markets by unraveling investor confidence and creating unstable regional economies.
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[1] Faculty of Business & Economics. The impact of terrorism on financial markets. The University of Melbourne.
[2] Gail Makinen (September 27, 2002). The Economic Effects of 9/11: A Retrospective Assessment. Congressional Research Service.
[3] Tom Wyke (November 29, 2015). “Terror attacks in Paris means visitor numbers across Europe tumble and France has already lost £1.4bn in tourism revenue.” Mail Online.
[4] Elvis Picardo (November 16, 2015). “Don’t Hide From The Reality Of How Terrorism Affects The Economy.” Investopedia.
[5] Elvis Picardo (November 16, 2015). “Don’t Hide From The Reality Of How Terrorism Affects The Economy.” Investopedia.
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