Paris attacks: assembling an economic analysis

posted in: Viewpoints | 0


On 13 November, the city of Paris was attacked by a group of armed gunmen killing 130 people and injuring a further 389. The brutality and atrocity of this attack will have lingering emotional consequences for the people of Paris, France, The European Union and the world, as well as a direct impact on policy, diplomacy and industry. Already, the French economy has slowed, leaving the services sector at a three-month low.

Impacts on French businesses following the attacks

  • There are reports that there are fewer people in cafes, restaurants and cancelled reservations.
  • Several sporting matches have been postponed and some concerts, musicals, and movie premiers have been cancelled.
  • Foreign firms such as Netherlands’ ABN Amro Bank NV, Japan’s Sharp Corp., and Airbnb Inc. have cancelled their events in Paris.
  • Arms Manufacturers’ stock prices increase following the attacks.
  • An increasing number of companies inquiring about insurance protection against terrorism, war and political violence.
  • There have been a number of cancelled flights.
  • It is likely that tourism, which accounts for 7.5% of France’s GDP, will suffer as a result of these attacks, though the extent of this impact is uncertain.
  • Considering the struggling French economy, consumer confidence may be further exacerbated.

Neighbouring Belgium, fearing that similar attacks would occur, remained in lockdown for a number of days following the 13 November attacks with metros, buses, cafes and cinemas closed. As it is shown in the graph below, while the Paris attacks have had a negative effect on Belgium’s markets but the true economic cost of the atrocity is unclear and the picture will likely sharpen over time[1]. Similarly, in the UK, the threat level has been raised to ‘severe’, and while the effect this will have on the economy is difficult to predict, history would suggest that greater defence spending and security measures will have an impact on the economy in the long run[2].


The economic impact of terrorism

Generally speaking, terrorist attacks have a small probability of occurrence but the economic and financial consequences can be significant[3]. After an attack, there is a period of heightened awareness and emotional distress, and reactionary political decisions by the state can be made in haste. The public are also on high alert and often avoid public gatherings and public transport. The economic impact from previous acts of terrorism, such as the 9/11 attacks, 2004 Madrid train bombing, and 7/7 bombings, has been closely analysed in the years since. After each of these events it is difficult to find a direct measureable effect on overall GDP as GDP captures the average performance of an entire country over an entire year[4]. Therefore, the effects of localised events of small duration, however significant, can be lost due to averaging and other effects occurring elsewhere in the economy. As an alternative approach, we illustrate the potential economic and financial impacts of these events using stock indices of different countries. The short run effects from these terrorist attacks are illustrated in the graph below:


Our research shows the economic impact of such incidents of terrorism, as the 15 November Paris attacks and the Charlie Hebdo shootings in January 2015, is considerable. These events arguably meet the definition of the TR1 terrorism scenario developed at the Centre for Risk Studies at the University of Cambridge and thus we are able to analyse their direct effects as a comparison to this part of our Taxonomy.

In the short term, the markets will be concerned on two fronts. First, they will worry about the impact on sentiment affecting consumer spending and corporate investments. The so called ‘fear factor’ will dampen confidence and decrease spending. This is particularly relevant in the run-up to Christmas. Second, the markets will be concerned about how the attacks might affect the tourism and leisure sectors over the medium term particularly because Paris is a top travel destination and early winter is peak season for Asian visitors to Europe. In the first weekend after the shootings, shopping and sightseeing went quiet and prominent tourist sights and department stores were closed though, it should be noted that, this was largely a matter of security rather than as a result of low tourist demand. One prominent tourist business in Paris said the impact of tighter security checks will no-doubt have a negative impact on the number of visitors coming to Paris. Some Paris hotels have reported a number of no-shows; with others reporting a wave of cancelled reservations. The impact of this crisis is also being felt on the financial markets. Shares in Accor hotel, Air France-KLM and Eurotunnel fell by 4.75%, 5.32% and 3.04% respectively.

A terrorist attack may also impact the economy in the long run by negatively affecting productivity due to more security, increased insurance premium and more checks and regulations. For instance, following 9/11, there were numerous security checks introduced at the US airports. Another major concern is the impact on border controls, immigration and foreign trade, and the effect these will have on France’s trade as well as the global economy.

In order to understand how the Paris and French economy might be affected in the aftermath of the recent shootings we analyse the sectoral impacts after 9/11 in the USA; The London Bombings after July 7th 2005 and the Madrid Bombings on March 11th 2004.

The short run effect of 9/11 on the financial markets is illustrated in the graph below for Insurance; Aerospace and Defence; and, Hotels, Restaurants and Leisure. After 9/11, the S&P500 index dropped by 12% and recovered to pre-crisis levels 18 days later. The Aerospace and Defence, and the Hotels, Restaurants and Leisure sectors were the worst affected sectors and dropped by almost 20% within a few days of the attack, taking approximately 70 days to recover to pre-crisis levels. The New York Stock Exchange returned to pre-crisis levels 28 days after the attack.


The 7/7 London bombings had less of a financial impact than 9/11 with the FTSE registering a drop of around 3% on the day of the attack and then recovering to pre-crisis levels the day after. The Travel and Leisure sector took a further 24 days to recover.


The 11-M Madrid bombings had a significant impact on the financial markets. The IBEX 35 index suffered a peak-to-trough loss of around 7% and took 19 days to recover to pre-crisis levels after the attack. In this disaster the Insurance sector was the worst performing sector and took over 170 days to recover while the Transport sector took 14 days.


The graphs illustrate the impact that terrorism had on Travel and Leisure, and the Aerospace industries. Although the stock markets in S&P 500, IBEX 35, and FTSE 250 all fell following the various attacks, each recovered within a few weeks.

In the few days following the November Paris attack, the Parisian stock exchange actually increased by around 1%, whilst a nearly ‘flat’ outcome was received in the European markets. According to Chen and Siems (2004), this may be explained by the fact that modern markets are much more resilient following the Great Financial Crisis and are able to absorb such shocks without diffuse damage[5]. For instance, following the Paris attacks, the markets have been surprisingly sanguine.

The CRS World City Risk model records Paris’ city GDP as $620 billion in 2014, with a projected annual growth rate, holding everything else constant, of 1.9% — its GDP will be an estimated $631bn in 2015, rising to and $644bn in 2016. Our model suggests that the occurrence of scenario TR1 in Paris in 2015 will lead to the reduction of Paris’s GDP for 2015 to $622 billion, indicating a loss of around $9.5 billion. This will have a domino effect on subsequent years; therefore reducing 2016 GDP to $641 billion, which is $3.2 billion lower than baseline projections for the year. The economy is then predicted to recover to the previously projected GDP of $656 billion for 2017. The scenario produces a loss of approximately $12.7 billion GDP, relative to the projected baseline, over the next two years, that is the ‘GDP@Risk’ of an event on the scale of the 13 November attacks is $12.7 billion.

The more complex part is assessing the probability of such events. We have a probability of 1-in-80 for the occurrence of this TR1 scenario in Paris in any given year (with annual probability of 0.0125) based on an estimation that attempts at serious attacks of terrorism occur once every 4 years, and that counter-terrorism operations might fail to prevent the attacks about 5% of the time (an expectation that 1 in 20 of attempts succeed).

It is clear that terrorism is an ongoing threat in many economies and, therefore, it is crucial that we are aware of its consequences and how to minimise the losses accrued by such acts. In today’s society, with the added dynamic of social media, news spreads extremely quickly and, as a result, the negative impacts of a terrorist attack on businesses, financial markets and the economy can occur abruptly. On balance, the evidence suggests that there are short term negative economic effects in the market, whilst in the long run the cost can be much higher with consequences affecting public spending, consumer confidence and business investment. The full extent of the effects of terrorism on a country’s GDP can therefore be significant and are often underestimated.

Viktorija Kesaite, Andrew Coburn, Scott Kelly, Jay Jung

[1] Morris, Chris. ‘A difficult week in Brussels’. BBC News 2015. Web. 27 Nov. 2015.

[2] Casciani, Dominic. ‘Paris Attacks: Could They Happen In The UK?’. BBC News 2015. Web. 27 Nov. 2015.

[3] H. Richardson, P. Gordon, J. Moore (Eds.), The economic impacts of terrorist attacks, Edward Elgar (2005), pp. 218–241.

[4] Quarterly values are usually estimated from best available information and from surveys and are adjusted as more information comes in.

[5] Chen and Siems, 2004, The effects of terrorism on global capital markets European Journal of Political Economy, 20 (2) (2004), pp. 349–366.

Viktorija Kesaite

Viktorija Kesaite

Viktorija Kesaite has recently completed an MSc in Economics from the University of Nottingham which was fully funded by the European Union. Prior to joining the Centre for Risk Studies, she worked as a language interpreter for several years, her most recent employment being with the University of Nottingham.
Viktorija Kesaite

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