In recent years terrorism has increasingly focused on civilian and businesses as targets rather than military ones. This seems to be because of the increased disruption it causes, not least on consumer behaviour. This change of tack has two effects: the physical effects of the attack and the fear factor on consumer behaviour. Arguably, it is the fear factor that has the biggest effect.
The siege mentality
The fear of a terrorist attack can live in people’s minds long after the event itself. What is more, the fear of what may happen, however realistic or imagined, can have an equally significant impact.
When people feel worried by the likes of terrorism, or other significant events over which they have no control, such as climate change, oil prices or even inflation, they begin to suffer from a lack of confidence in the economy and their ability to continue a certain standard of living. This can cause people to focus on the things over which they have got control and develop a siege mentality. The effect on the lending industry can be that people start to hoard their resources in case of a negative event and stop wanting to borrow money.
Media coverage can exacerbate this fear factor and the consequences. Obviously bad news sells newspapers and scare stories can be guaranteed to get tongues wagging and increase readership. But it often increases consumer concern well beyond the realms of what is probable. We are told that things are bad and so worry about them and start to take avoiding action. When consumers feel confidence in the economy and their environment they are happy to spend and borrow – conversely it is this lowered confidence that persuades people to tighten their belts and rein in their spending.
A significant effect
A recent International Monetary Fund (IMF) report also showed that it is consumer confidence that can have the biggest effect. It revealed that a terrorist attack had a direct and indirect impact on financial markets and that these had three effects over time: short-term direct effects; medium-term confidence effects and longer-term productivity effects.
The direct economic costs of terrorism included the cost on life and property, and the responses to the emergency such as restoration of the systems and infrastructure affected. These effects tend to take place immediately after the terrorist attack and tend to be relatively short-term. The direct financial impact depends on the scale and the type of the attack.
The less recognised, indirect costs of terrorism were showed to be much more significant and have the potential to affect the economy in the medium-term by undermining consumer and investor confidence.
A deterioration of confidence can reduce the incentive to spend as opposed to save, and this can spread through the economy and the rest of the world through normal business cycle and trade channels. This can have an effect on output which leads to a fall in investor confidence. This in turn can lead to an increase in the cost of borrowing.
Over the longer-term, attacks can therefore have a negative impact on productivity by raising the costs of transactions through increased security measures, higher insurance premiums, and the increased costs of financial and other counter-terrorism regulation.
Fraud and abuse
Aside from the type of event that we all think of as a terrorist attack, financial markets and institutions can suffer from their own type of terrorism. The IMF stated that financial institutions can be subject to different types of fraud or abuse; they can directly commit financial crimes; or they can be used by third parties to commit crime. Similarly, terrorism can have multiple implications for financial markets.
When the World Trade Centre was hit, it was a direct attack on one of the world’s main financial centres. It not only damaged the building, but also caused a huge amount of financial insecurity and market volatility. The impact of this was felt in financial institutions world wide and all the major equity markets saw sudden and dramatic declines which continued for over a week. Once again, lack of confidence was a key constituent, which was felt not only in the US, but had a ripple effect around the world.
Western financial markets however, while obviously affected by terrorist attacks have proved to be remarkably resilient and quick to return to normality. Once the shock of a terrorist attack is over, and after the initial drops, markets bounce back to return to normal within a remarkably short period of time, and then continue to rise.
y far the biggest effect terrorism has is its ability to evoke fear. It is the change that fear creates in borrowers that has a much bigger effect on our business than any physical damage caused by an attack. mi
