Hamish McRae: All agreed on the economy but what about the aftershocks?

The thing to do is to start with the sensible view of the economy and then ask what might change it

The thing to do is to start with the sensible view of the economy and then ask what might change it

Where are the potential shocks? It might seem strange, after that most dreadful of shocks, to ask such a question. But amid all the present uncertainty, a consensus is beginning to emerge about the likely course of the world economy in the coming months. The question then becomes: if this consensus is more or less right, what new shocks might arise that would unseat it?

First the consensus, which runs something like this: the events of 11 September have struck a US economy that was already turning down and will steepen that downturn. This is largely because of the disruption and the adverse impact on consumer confidence. There will then be some knock-on impact on the rest of the world, possibly resulting in a world recession this winter. But there will be some offsets in the shape of lower interest rates and additional US government spending and next year there will accordingly be a reasonably secure recovery.

Now the shocks, in no particular order, that might upset this reasonably sanguine outlook. One is that there will be further terrorist attacks. These would presumably take a different form and, hope against hope, would not be so devastating to human life. But any such attacks, however minor, would be deeply damaging to confidence. The world economy would find it much tougher to sustain a recovery until it was clear that a reasonable level of security has been re-established.

A second shock would be a prolonged period of uncertainty because of uncertainty about the response of the West to the initial one. At a minimum, there will be several months of uncertainty. Any military action beyond punitive raids takes months to prepare. It will take a long time before the West could be at all confident that the main potential terrorist threats have been identified and tackled. Sadly, we have to accept the possibility, even the probability, that initial efforts to tackle the threat will be unsuccessful for there is no single, simple target.

That leads to a third shock: that disruption in the Middle East will lead to another energy crisis. It was a surge in the oil price that triggered two of the last three recessions (in the early 1970s and the early 1980s), while the Gulf war exacerbated the early 1990s one. There is a general perception that the world is less dependent on Middle East oil than it used to be, and it is true that Opec is not the power it was. But the relentless rise in US oil and gas demand have offset efforts to diversify: as the graph shows, this demand is expected to continue rising for at least another 20 years. At present consumption rates, there is about 45 years' supply left in the world, though of course more will be discovered. Something like 70 per cent of the world's known oil reserves are in the Middle East. If the US has become less dependent on Opec production on a short-term basis, in the medium-term its dependence on the Middle East is, if anything, rising.

A fourth shock would be serious market disruption. The physical infrastructure of the markets has proved remarkably robust over the past 10 days but as the slide in share prices shows, the toll on market confidence has been serious. A bad day, a bad week, even a bad month is all perfectly survivable. But were share prices to fall, say, by another 30 per cent in the next six months, there begins to be come a danger of a systemic failure. That would be when the stability of one or more large companies or financial institutions threatens to bring down others. There is not evidence of this at the moment but it remains a danger.

Finally, among the "what ifs?" there must be a fear that consumer spending will fall much more sharply than has been forecast: people will freeze. Any big decisions on spending would go on hold for an indefinite period. Again, there is no evidence of this but it remains a danger.

Aside from those five potential shocks there are others that are too dreadful to bear thinking about. So let's not think about them and instead look to positive influences. These positive factors are not going to help in the coming weeks but they will be part of the forces that buttress the recovery. One is the way in which a cross-cultural coalition against terrorism is being assembled at astonishing speed. Maybe it is not so surprising, for all governments of whatever persuasion are equally threatened by terrorism: terrorism by its very nature is anti-government. If this coalition holds it would be bad news for terrorists all over the world and that will help rebuild confidence.

A second positive factor will come from additional public spending. The spending to combat this threat will not, in general, be the same as the spending to combat conventional enemies, for much of the money will go on software, not hardware. But a string of new technologies will be developed or modified to make life safer for ordinary people. These will range from iris recognition to better use of databanks. There will inevitably be concerns about civil liberties, and rightly so. Nevertheless, if human safety is paramount, it should be possible to use clever electronic technology to help provide that while maintaining adequate safeguards.

A third positive factor may result from pressure on government to lift its game. What has happened was a failure of the public sector: defence of the homeland has been a prime responsibility ever since nation states evolved. It would be astounding if tough questions are not being asked within governments everywhere about their competence. Do they employ good enough people and train them adequately? They have enormous resources but do they deploy these appropriately?

If governments learn the right lessons then maybe they can be cleverer at tackling less dramatic threats, and perform other functions more efficiently.

We will see. In the months ahead, the thing to do is to start with the mainstream sensible view of the evolving economic situation – and then ask what might change it. And in so doing, note that there will be good news as well as bad.