Has September 11th changed the financial world?

This report considers the impact of the attacks on the world economy, financial markets and geopolitics. We draw a distinction between temporary and permanent effects: for economics and markets this is the familiar issue of cyclical versus structural.

On geopolitics, we conclude that there will be important and lasting effects. New alliances have been formed, and old ones put under pressure. US foreign policy has taken a radical new direction. Three blocs – liberal democracies, China and the Muslim world – now dominate the world. Whether the next few decades are characterised by peaceful economic expansion or conflict and stagnation will depend in large part on how these three blocs interact.

Our tentative view is relatively optimistic. There are clear negatives - Bush’s decision to impose tariffs on steel imports may have started a trade war. The US seems set on attacking Iraq. Further terrorist attacks are highly likely. There will be other, unforeseeable, conflicts but there are also some positives. There is now a better chance that the US will engage constructively with China, Russia is attempting to become a western-style democracy and terrorism provides a common external threat to Muslim and western governments alike.

The cyclical effects of 11 September are receding rapidly. World trade, investment and economic output have all suffered a setback but should resume their old trends before too long. In normal circumstances, this would be an excellent background for equities. The key concerns here are the quality and quantity of profits, notably in the US, and these have relatively little to do with 11 September. We conclude that 11 September has changed the world but, for financial markets, we believe that the impact has been brief and moderate.

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