"It's all over for the global economy," they shout. But why are some people whispering in the corner?

<em>Terror in America: The Economy</em>

The rarefied community of UK economic decision-makers has split into two factions since the New York atrocity. There are the Shouters, or those declaiming that everything has changed, and the Whisperers, who deny - in slightly hushed terms - that anything of fundamental economic importance has happened.

In the Shouter camp are most important people in the City, the vast bulk of media commentators and a smattering of industrialists. See them hail the impending and terrible recession on TV, in newspaper headlines or on dealing screens covered in red numbers (the electronic manifestation of plunging stock markets).

People will fly less frequently for ever, they say. Consumers will feel less comfortable about making expensive purchases for years. Businesses will remain more cautious about investments for the foreseeable future. Why? Well, how could such tragedy fail to engender such big economic shifts? And if bad times are looming, the terrorists must be to blame.

Less conspicuous and considerably duller are the Whisperers, who consist of most of the Treasury, the Bank of England, academic economists and more venerable business people. They mutter that they have heard these doom-laden predictions many times before - but that the typical reaction to this kind of shock is a downturn of surprisingly short duration. Thus the 1991 Gulf war, which prompted all manner of gloomy forecasts about the US and European economies, was actually at the beginning of an unprecedented ten years of economic growth. And the share price collapse on Black Monday in October 1987 was viewed as a catastrophe by central bankers and finance ministers, who then cut interest rates all over the world. As it turned out, the world would have been better off if they had left well alone. Far from staving off recession, the rate cuts pushed up inflation - so when a slowdown did eventually come, it was more painful than it needed to be.

The Whisperers do not deny that the stakes were very high over the past few days. If an important bank or financial institution had collapsed, if stock markets had failed to function properly, the ramifications would have been appalling. But the global financial system is intact. A recession is probable, largely because growth was already so anaemic. But the Whisperers' core conviction is that the global economy is comparatively resilient and will probably recover quite fast (within months, not years).

You can also see a Shouter/Whisperer split between different countries. For understandable emotional reasons, the US is a Shouter, although it makes the semi-paradoxical claim that the sheer will, guts and determination of the American people will see the economy emerging stronger at the end of the crisis. Even the US central bank, the Federal Reserve, has been shouting. Last Monday, it cut interest rates by 0.5 per cent before the stock market reopened after its long closure. The move looked panicky. In the absence of hard data about trends in the economy, it would surely have been better to wait and see how share prices performed.

The point is that central banks should always be Whisperers, never Shouters. If markets come to believe that interest rates are set in an irrational way, then the game is up. On the other hand, the emotional and political pressures on the Fed were egregious. Far less excusable was the European Central Bank's copycat rate cut, made only hours after it said that there was no need for it. The financial markets' lack of confidence in the bank is becoming a serious problem. Anyway, the Bank of England's decision to cut last (a day later) and cut smallest (0.25 per cent instead of 0.5 per cent) is moderately reassuring.

So you have probably guessed by now that I am an instinctive Shouter who would rather be a Whisperer. Why my inner turmoil? Well, during the Gulf war I feared the worst for the airline industry after I travelled to the US in a 747 accompanied by just two other passengers - a wonderfully luxurious way to fly, but just a tad uneconomic for British Airways. After prognostications of doom for the airline industry, passenger numbers did indeed decline that year, though only by a couple of percentage points. The following year, they rose by 5 per cent.

Once again, the outlook appears dire for airlines. However, British Airways reported an 11 per cent fall in passenger traffic over the summer, before the 11 September catastrophe. This is an industry already suffering from excess capacity. Many of the lay-offs now being announced, by Continental in the US and Virgin in the UK, might well have happened anyway. This would not be the first debacle used by companies as an excuse for redundancies they wanted to make in any event.

Similarly, British retailers have detected a smallish fall in sales, especially for so-called big ticket items (cars, PCs, designer clothes and so on). Retailers and hotels dependent on tourist spending look particularly vulnerable. However, most store groups believe that Princess Diana's death, which prompted a downturn in spending, will turn out to be more expensive for them. You may question whether consumers' priorities are quite right. But a Whisperer manque like myself would caution against arguing with the bald facts.

My Shouter instincts will doubtless return, as and when the US "war" against terrorism is launched. The resulting fear and uncertainty will be bad for economic stability. The Whisperers would then point out that any increase in defence spending could be just the tonic the US economy needs. But they would say this very softly indeed.

Robert Peston is editorial director of QUEST(TM); http://www.csquest.com ; e-mail: rpeston@csquest.com

This article first appeared in the 24 September 2001 issue of the New Statesman, The war that Bush cannot win