Tourism, Spending Likely to See Biggest Economic Impact of Paris Attacks

The human impact from Friday’s terrorist attacks in Paris is immeasurable. As the world mourns the loss of life and the threat of terrorism, analysts say there’s no doubt fear will ricochet through the global economy. But they have varying opinions about the degree to which it will likely be felt not just in France, but as far away as the United States.

France’s tourism industry is likely to take the biggest immediate punch from Friday’s gruesome events. According to 2014 data from the International Monetary Fund, France is the world’s sixth-largest economy – the second-biggest in the eurozone, and figures from the Paris Convention and Visitors Bureau show the tourism industry makes up nearly 7.4% of the country’s gross domestic product. Adding to that, the French Ministry of Foreign Affairs and International Development estimates the nation welcomed 84.7 million foreign tourists in 2013, and saw benefits from tourism-related revenue totaling 42 billion euros.

While the sparkling lights of the Eiffel Tower and the history behind the Louvre and Arc de Triomphe beckon tourists from all corners of the world, Charles Lichfield, Eurasia Group analyst, said recent events will likely force would-be visitors to think twice before booking a trip – especially in light of the Charlie Hebdo attack in January, and Friday’s widespread massacre.

“Two attacks in one year, especially the second [on Friday], targeting people enjoying a night out, reaches a weariness threshold, and it will affect tourism,” he said. “We’ve already seen lots of canceling, tourists leaving Paris after news of the attacks. “

But it’s not just the country’s tourism industry that’s likely to take a hit. Consumer sentiment and spending also stand to lose.

IHS Chief European and UK Economist Howard Archer said in a note on Monday that while he doubts consumer spending in France will be markedly affected, the more confidence there takes a hit, the greater risk consumers will stay cautious longer.

“Most obviously, consumers may be particularly wary in the near term at least of visiting cafes, bars, and public places in Paris, and perhaps other major French cities,” he said. “Any hit to consumer spending would be unwelcome for France as consumer spending has recently been one of the stronger areas of the economy. “

Recent data show overall consumer confidence in the nation fell from an eight-year high in October as consumers were less sure of their ability to add to their savings or make large purchases. Consumer spending, meanwhile, was flat in September for the second-month in a row, while economists had expected a gain.

For context, Archer outlined the economic impact the London and Madrid bombings had on their nation’s respective economies. Following the 2005 London subway and bus bombings, in which 52 people died and more than 700 were injured, consumer confidence rose in July while the economy grew 1% quarter over quarter – however, at that time, the UK economy was performing relatively strongly.

Similarly, the 2004 Madrid train bombings killed 191 people and injured 2,050. GDP growth following the attack fell 0.6% quarter over quarter. Still, Archer cautions other factors were at play including a slowdown in consumer spending and investment during that time.

Through the Lens of Eurozone Malaise  

It’s no secret the eurozone has been battling an economic slowdown. Just last week, European Central Bank President Mario Draghi said the ECB will weigh the possibility of  fresh round of stimulus at its December meeting when new economic projections become available. The announcement came on the heels of the central bank’s decision to keep its benchmark interest rate steady at 0.05%.

The ECB already has a 1.1 trillion euro bond-buying program in place.

Global Risk Insights Analyst Julien Freund said the recent attacks in Paris will no doubt deliver a blow to the euro in the short term, while investors become less and less likely to take risks in the stock market and instead flee to the safe havens of bonds and commodities.

“Longer term, the ECB was already expected to give more easing to the European economy…this event and other potential attacks will urge it to take that step and extend QE and cut rates. For the global economy, what that means is the U.S. will have to take this into consideration when thinking about its own rate hike. That will change a lot of things in the global economy,” he said.

The Federal Reserve is widely anticipated to hike short-term rates from historic lows at its December meeting after opting in September to keep rates steady, much to the surprise of investors.

Freund added that border controls recently put in place could also cause longer-term effects that could urge more easing from the ECB. He said the refugee crisis, coupled with the heightened terrorism threat could pose a more significant roadblock.

“The benefit of open borders is it makes trade cheaper and more effective,” he said. “It’s as simple as this: Instead of waiting for a few hours at the border for trucks, they’ll have hour-long lines, and that will raise the price of products and the time it takes to deliver. If we go to the end of the Schengen Area, that will have exponential effects on the eurozone.”

The Schengen Area, defined by the Schengen Agreement signed in 1985, is made up of 26 European nations that have together done away with traditional border control checkpoints that include passport and bag checks.

The recent Syrian refugee crisis, and now the heightened terror threat, has caused nations in that area, including France, to suspend the Schengen Agreement.

Lichfield said that while border checks have been reinstated temporarily, the borders still aren’t exactly “closed.”

“There might be a bit of a slowdown at the moment, but trade won’t be impinged,” he said. “We’re currently seeing an emergency situation, but it would take political pressure to make it permanent. The question then would be how long it takes goods to cross borders, and then we could see supply chains at risk of being disrupted.”

He added that the political pressure is “very strong” and “something will be done.”