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2001 – THE EVENTS OF SEPTEMBER 11

The events of September 11, 2001 have had dramatic effects on the Canadian economy, and the full impacts are yet to be determined. On that day, two jetliners destroyed both towers of the New York World Trade Center, one jetliner flew into the Pentagon in Washington, and a fourth crashed in a Pennsylvania field. While the most direct impacts were felt in the United States, the events of September 11 created short- and long-term ripple effects throughout the world.

In Canada, the impact started immediately: all border crossings into the United States were closed within hours. Given the high degree of integration between the economies of the United States and Canada, shipping delays increased costs in the manufacturing sector. When the Canada–United States border and shipping terminals were re-opened, security was increased. Closer scrutiny of goods created bottlenecks in supply chain management systems (i.e., just-in-time delivery systems), causing difficulties for manufacturers. Individuals crossing into the United States also faced heightened security, which caused long queues and wait times at border crossings.

The events of September 11 exacerbated the slowdown in economic activity already affecting the Canadian and U.S. airline and aviation industries. The airline industry suffered massive financial losses when all commercial jet traffic in North America was grounded due to security concerns in the days following the attack. Once flights resumed, the severe drop in passenger traffic cost airlines billions in lost revenue. Massive layoffs and bankruptcy plagued the industry, and federal aid programs were implemented in both countries. As the number of international tourists plummeted, the service sector, including tourism, restaurants and hotels, saw a sharp decline in business.

There was also an immediate reduction in consumer and investor confidence. The uncertain economic climate and large-scale layoffs reduced consumer demand for goods and services. Canadian gross domestic product for September 2001 was down 0.6% compared with the previous month. The unemployment rate rose steadily during the fourth quarter of 2001, to 8.0% in December from 7.2% in September. Investor anxiety about the state of the economy and subsequent terrorist attacks caused stock markets to plunge. The property/casualty insurance industry faced the most catastrophic loss ever: aviation, property, life, health, liability and business interruption were all simultaneously affected.

Around the world, central banks reacted by lowering interest rates. With the destruction of capital stock (i.e., buildings and infrastructure), loss of consumer and investor confidence and massive layoffs, economic activity decreased. The common policy action for events such as these is supplying more financial liquidity. Central banks around the world acted quickly to provide the required economic stimulus. On September 17, 2001, the Bank of Canada lowered its key overnight rate by 0.5 percentage points to 3.5%, the U.S. Federal Reserve trimmed rates by 0.5 percentage points to 3.0% and the European Central Bank cut rates by 0.5 percentage points to 3.75%.

The long-term consequences for Canadian businesses and individuals continue. Business activity did rebound following September 11: new orders, production, employment and profitability recovered for Canadian manufacturers and exporters.

But other effects on the economy remain. In the United States, the Department of Homeland Security was created to unify efforts to secure that country from further terrorist attacks. Canada and the United States created a 30-point Smart Border Action Plan to make the border more secure and facilitate the legitimate flow of people and goods. T he Government of Canada has increased spending to improve both internal and border security. A new Air Travellers Security Charge was implemented to help fund security measures. Regulations for international commerce have been tightened. The Bank of Canada continued to lower interest rates into early 2002 to help restore consumer and investor confidence. Higher insurance premiums and deductibles have become standard, as insurance companies have altered how they evaluate and underwrite risk.

Like all modern economies, the Canadian economy now exists in a state of continued concern over the possibility of unpredictable catastrophic events. Globalized economies with broader economic integration are subject to broader exposure to unforeseen risk. The fundamental shifts in preparedness caused by the events of September 11 will continue to shape the policies, regulations and security of Canada and the world.

Links

The Department of National Defence and Canadian Forces response to September 11, 2001
Source: National Defence
http://www.forces.gc.ca/site/Newsroom/view_news_e.asp?id=430

Financial Rates & Statistics
Source: Bank of Canada
http://www.bankofcanada.ca/pdf/annual_page1_page2.pdf

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