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Economic Effect of Most Recent Terror Attack

By 18th November 2015 News No Comments

London-Bridge

After the shocking atrocities in Paris on Friday evening, tensions across Europe are at an all-time high, with further attacks from ISIS seemingly imminent. The total cost of terrorism in the Uk stands at £52.9bn up 60% from 2014 and they now rank 28th on the terrorist incident list from 128 countries in Europe. So how did the markets respond and why did they respond in such a way?

Market’s respond

Both the Cac40 and the FTSE 100 opened lower but recovered well with the 2 indexes closing 0.1% and 1% lower respectively. Airlines, tourism and travel companies were hit the hardest with IAG down 3% and Air France KLM down 6%, but these were offset by positive moves in security and defence companies. The initial move was towards oil and gold which both significantly rallied but then fell 3% into the evening trading session, something that wouldn’t have happened should the markets have believed the economic impact was critical. So why was there no panic in the markets?

  1. The markets had been struggling all week and further downside potential was limited.
  2. In terms of the impact of this terrorist attack, the economic effects aren’t that severe with the only areas potentially affected being consumption and manufacturing- something that will be explored later
  3. The ECB are more likely to become accommodative to the struggling European countries.
  4. Unfortunately, people are becoming emotionally weathered by such events and with the danger constantly talked and written about in the press, people almost price in an attack of some kind. This however wasn’t the first one in very small space of time and should attacks continue the effect will certainly become more pronounced.
Terror’s effect on Retail & Manufacturing

Retail and Manufacturing are the 2 main areas which could see declines due to the most recent terrorist attacks. It is likely that people will stay away from busy central locations and thus a decline in consumption will be seen however this is believed to be postponed and not abandoned- any losses seen will be neutralized by increases in coming months. Manufacturing may also record poorer numbers as questions over Europe’s Schengen Zone have resulted in tighter border controls around Europe (1 ISIS terrorist suspected to have passed from Greece) will make transportation of components and finished goods slower and therefore more expensive.

The main funding source of ISIS is the oil fields in Syria with expected income $1.5m a day, with oil sold equivalently on the black market within ISIS controlled states. The new strategy employed by those standing up to this threat, is the bombing of the transportation lorries and the fields themselves to try and stop the funding at source- will this affect the price of oil? Although fundamental to the maintenance of ISIS, the amount of oil they control is negligible in the grand scheme of things. They currently export 40,000 barrels a day, which is nothing in comparison to the current production of oil- Global supply of oil exceeds demand by over 900000 barrels a day. The last time a serious event caused a spike in oil was during the overthrow of Qaddafi during the Libyan revolution in 2011 in which over a million barrels a day were knocked off total oil production.

It is clear that the economic effect is one that pales in significance compared to the psychological and emotional effect. People are undoubtedly cautious particularly in Europe but also across the world. Political policy is questioned in such times and the French National Front (3 weeks to vote) and the Spanish Podemos party (1 month to vote) are gaining significant ground. Should there be continued attacks, the effects may however become far more significant.