Economic Trends
Edited by Kathleen Madigan
Switzerland Is Sitting Pretty
Early this year, when it became clear that among the fallout from the tech-stock bust would be a global downturn, the dollar acquired the patina of a safe-haven currency. Traders believed that the dynamic U.S. seemed likely to recover before any of the other industrialized nations and that the Standard & Poor's 500-stock index still was the best performer of the world's major stock indexes. That's why, despite European policymakers' insistence that Europe would fare better in a downturn than the U.S., the greenback still kept trumping the euro.
So much for the dollar as safe haven. Sept. 11's attack on America sent rich investors back to their currency bunker: stuffy old Switzerland, land of private banks. Laurie Cameron, a global currency strategist at J.P. Morgan Chase & Co.'s private bank, says that since the disaster, the Swiss franc has risen about 6% against the dollar. On Sept. 17, the dollar was trading at 1.6044 Swiss francs, compared with 1.6886 francs on Sept. 10, the day before the attack (chart). "When there's a crisis, the focus immediately goes to current-account surpluses," says Cameron, who handles foreign exchange transactions for wealthy clients. When calculated as a share of gross domestic product, Switzerland "has a 12% surplus, whereas we have a 4% deficit." Sure, the country has hardly been a hotbed of growth. Since 1998, according to Morgan Stanley, the Swiss economy has grown between 1.5% and 3.5% a year. But inflation has hovered between 0% and 1.6%.
Beyond being a picture-perfect mountain fastness, Switzerland's sophisticated financial infrastructure really does provide a high degree of protection. "Wealthy people understand that it's a safe place.... There's a lot of liquidity. You can take a lot of cash out," Cameron says.
And for all the country's wealth, Switzerland doesn't incite extremist rage the way the U.S., with its conspicuous cultural icons, does. As Paul Podolsky, chief foreign exchange strategist at FleetBoston Financial Corp., points out, "in Switzerland, they may not produce anything, but they don't produce Baywatch either."
Will Investors Shun the U.S.?
Forecasters agree that the Sept. 11 attacks are likely to depress economic growth in coming months because nervous consumers and corporations might stop spending. But a new study published by the National Bureau of Economic Research examines the longer-term consequences of terrorism.
Alberto Abadie of Harvard University's John F. Kennedy School of Government and Javier Gardeazabal of the University of the Basque Country in Bilbao, Spain, looked at the economy of the Basque region--which had to deal with a separatist movement from the mid-1970s to 1998. The terrorist group committed assassinations, extortion, kidnap for ransom, and robbery in a bid to create a separate Basque nation.
The researchers compared the region's gross domestic product with that of other Spanish areas over the 20-plus years of insurrection. They found that Basque per capita GDP was 10 percentage points lower than that of the other regions. The authors concluded the risks associated with terrorism deterred domestic and foreign direct investment, leading to reduced output.
Clearly, there are differences between the Basque experience and recent events. But the U.S. is highly dependent on funds from home and abroad to finance investments on high-tech equipment, commercial real estate, and product innovation. Will that inflow of money continue now that terrorism has struck at home? The sharp sell-off of the dollar against other currencies since Sept. 11 as well as the 685-point plunge in the Dow Jones industrial average on Sept. 17 are two signs that investors are wary of holding American assets. Even U.S. Treasury bonds have lost value as investors unload any securities tied to America. What the Basque study suggests is that if the terrorist situation is not resolved quickly, the resulting uncertainty will make it harder for companies to raise the private capital needed to get the economy growing again.
Small Sectors--but Big Drops
Although the third quarter had only three weeks left to run after the terrorist attacks, the impact was so great that many economists have revised downward their third-quarter gross domestic product estimates, forecasting the first drop in output since 1993. Industries that have seen business drop off sharply include retailing, insurance, security brokers, air travel, lodging, and recreation.
While each of these sectors accounts for a small slice of GDP, the falloff has been so severe that it will cause a noticeable drag on overall GDP. For example, air travel and lodging make up just 2% of nominal GDP, but Maury N. Harris, chief economist at UBS Warburg, calculates that a 10% drop in these sectors' annual sales in just one quarter could subtract 0.8 percentage point from the growth rate of real GDP, which is the price-adjusted measurement of growth. That's significant enough to turn most third-quarter forecasts negative. In fact, Harris has revised his third-quarter GDP forecast to a drop of 0.5%, from a gain of 0.5%.
And the drag could be even worse. Domestic carriers are already forecasting cuts in flights and staff of 20%. If hotel stays fall by a similar amount, that would cut a large 1.6% from GDP. And with Americans still nervous about traveling, there is little chance of the losses being made up anytime soon.
Where Business Will Slow Sharply
SHARE OF
NOMINAL GDP*
RETAIL TRADE 9.2%
INSURANCE 1.8
SECURITY AND COMMODITY BROKERS 1.6
AIR TRAVEL 1.0
LODGING 0.9
RECREATION AND ENTERTAINMENT 0.8
* 1999 Data
Data: Commerce Dept.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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