Oil remains the great unknown

EVERYONE remembers where they were when they heard the news. As with the assassination of Kennedy almost four decades earlier, last September's terrorist attacks on New York and Washington made us feel that the Earth had suddenly lurched, violently and sickeningly, into a different and unstable orbit.

As Niall FitzGerald of Unilever vividly recounts below, for a moment - just a moment - we thought that the world might even be ending. (Indeed, for FitzGerald, only a single phone message saved the life of a member of his family).

Of course the world didn't end. The most powerful financial centre on the planet suffered a devastating blow to its very heart, yet within less than a week Wall Street was back in action. Business carried on. The global economy didn't grind to a halt.

Yes, Afghanistan was flattened (again). And 12 months on, the attacks on the US are repeatedly cited to justify a new Anglo-American assault in the Middle East. So was September 11 really a turning point? On September 12, was the world set on a course profoundly different from the one that we should have foreseen on September 10?

Without question, the global economy has slowed. Economic growth this year in the eurozone is likely to be little more than one-third of the level seen in 2000. Two years ago, the British economy grew by 3%; this year, the rate will fail to reach 2%.

And the US, having enjoyed storming growth during the latter half of the Nineties with national output cantering ahead by an average 4% a year, was slowing markedly in 2001 even before the attacks. The American economy grew in 2001 only because of increased state spending; the private sector actually contracted.

In truth, the global economic picture is probably little worse now than it would have been had last year's terrorist attacks never happened. The internet bubble had been deflating for 18 months beforehand: it is two-and-a-half years this month since the Nasdaq index of technology shares hit its peak. US consumers were fast approaching the end of the cul-de-sac of borrowing to finance their insatiable desire to spend. The boom didn't end on September 11; it was ending well before that.

Furthermore, just as the American consumer's desire to consume powered growth on the way up, so a new caution about spending could aggravate matters on the way down. Americans' spending habits reflect how rich they feel, not just income. When shares and house prices were booming, they were happy to spend, spend, spend. Now, that process threatens to lurch into reverse.

Share prices are emphatically not booming: they are scarcely higher than they were in the immediate, panicky aftermath of September 11. True, US shoppers have proved remarkably resilient so far: in the words of one commentator, while the country prepares for war, Americans go to the shopping mall.

But if we believe surveys on how consumers feel about the outlook - rather than their spending habits at the moment - that resilience could be about to crumble. Rebuilding personal and corporate balance sheets, saving more and spending less, would dent growth. Lower growth would depress the value of assets such as shares. And lower asset prices would make people even more inclined to save, not spend.

Perhaps the most profound shift induced by September 11 has been a new respectability gained by big government. True, few politicians will admit it. Certainly George W. Bush won't. But the attacks have given the staunchly right-wing Bush a remarkably convenient excuse to indulge in some very oldfashioned Keynesian pump-priming by increasing government spending on defence, which has helped to sustain activity. So far, even Bush hasn't dreamed up a way of privatising the war on terrorism.

Furthermore, no one enthuses as they might have done a year ago about contracting out public security jobs. On both sides of the Atlantic, there is a growing, if grudging, acceptance that the state should be allowed to infringe our civil liberties - by peering over our shoulders at emails, for example - if that helps curb terrorism.

And make no mistake, if growth in Europe remains sluggish, big government (for which read big government spending) might find new converts on this side of the Atlantic, too.

Of course, eurozone countries are, in theory, constrained in how much their spending can exceed taxation if they are to remain within the limits laid down by the Stability and Growth Pact. (Bill Martin, economic sage at UBS Global Asset Management in London prefers the term Instability and Not-much-growth pact.)

The pact is meant to limit governments' profligacy: after all, it's not just their own country's currency they're dealing with. But one can confidently predict that governments across Europe will be looking at every conceivable way to prop up their economies' performance.

For those who remember the Seventies, some things from the current landscape feel familiar: public sector labour unrest, Green Goddesses being dusted off. Just one thing is missing - soaring oil prices. After September 11, the price of oil spiked up briefly to nudge $30 a barrel. Two months later, it fell below $18. Recently, amid hawkish talk about Iraq, it has topped $28.

As we look ahead, the oil price is the great unknown, the profoundly unfunny joker in the pack. Since the Second World War, every period of strong expansion has been achieved on the back of cheap oil. And every sudden and sustained rise in the price of crude has brought growth shuddering to a halt.

Immediately after September 11, Saudi Arabia went out of its way to reassure the market by pledging to open the tap on its huge reserves if supplies from elsewhere were to suffer large-scale disruption.

The Saudis no longer feel quite so benevolent towards the US. They have made it abundantly clear that they utterly oppose the idea of an American assault on Iraq. The risk of a devastating increase in the price of oil is far greater now than it was after September 11.

If Iraq is attacked and that provokes retaliation from other Middle Eastern oil producers by withholding supplies, the effect on the West could be devastating. The terrorist atrocities of September 11 would finally have their economic impact - 12 months on.

Eight enduring memories of carnage

NIALL FITZGERALD
chairman, Unilever
'I was in Spain and I was going to the swimming pool when I switched on the TV news. I called to Ingrid, my partner, and told her to come and see what was happening, and just as she came into the room the second plane went in. At first, I thought it was a re-run of what had already happened, then I realised there really was a second crash. At that point I thought, 'God, the world is ending''. My son was in New York. We couldn't get through until the evening. Then I discovered he had been due at a meeting in the South Tower at 8.30 that morning. Someone had phoned the previous evening and left a message on his answer machine to cancel the meeting. To this day he doesn't know who left that message. I said it was his guardian angel.'

SIR MICHAEL BISHOP
chairman, bmi British Midland
'I was in a conference room in the Marriott Hotel in Birmingham at a meeting with our executives. The phone rang and my operations director told me to watch a TV. We commandeered one and halted the meeting. My most abiding image was the very graphic demonstration of power - how planes could bring down two enormous buildings.'

MATT BARRETT
chief executive, Barclays
'I was with all my senior colleagues at an off-site meeting of the bank's executive committee in Godalming, Surrey. The news came through from Tom Kalaris who heads up Barclays Capital in New York where we have a substantial office just blocks away from the World Trade Centre. Tom was still in our building at 222 Broadway and the events were clearly visible from the office window. We terminated the meeting and returned to London. My first thoughts were for our staff [all 1,000 were evacuated safely] and for family members and many friends who live and work in the city.'

PETER ELLWOOD
group chief executive, Lloyds TSB
'I was hosting a Lloyds TSB Charitable Foundation Trustees' lunch here at 71 Lombard Street. Being at the heart of the City while watching the heart of another being destroyed was a haunting feeling. After the initial shock at the personal tragedies unfolding, my next thought was to gather my crisis management team together. I think the events of that day and the aftermath have made everyone re-evaluate what's important and to make sure that every day is truly valued. I've always been a believer in the benefits of getting the right worklife balance and September 11 certainly made many of my peers and colleagues in the City review their priorities.'

DAVID MICHELS
chief executive, Hilton Group
'I was in a Hilton Hotels Corporation board meeting in Los Angeles when I heard. I knew right away that something on that scale would have a profound effect on our sector and while there would be recovery, it would take some time.'

Michels, trapped in the United States because all civil aircraft grounded, hired a car and drove to Las Vegas to indulge his passion for gambling before catching a flight home the following weekend.

SIR RICHARD BRANSON
founder and chairman, Virgin Group
'I was in Brussels about to address a European Union inquiry on block exemption for European car manufacturers. As I was about to start my withering attack on the vested interests in front of me, someone passed a note to the chairman, who looked up with an ashen face and announced there had been a terrorist attack in New York that involved a number of aircraft. He asked me if I wished to continue. None of us knew how serious things were, but they did not sound good. There was concern that the EU building could be a target. None the less I decided to carry on, deliver the speech and answer questions from the MEPs, knowing full well that everyone's mind would be on New York.'

PAUL ROY
co-president of global markets and investment banking, Merrill Lynch
'I was in my New York office, one side of which looked out on the twin towers. We heard the first bang and saw one of the towers on fire. When we saw the second plane go in I knew immediately it was a terrorist attack. We were evacuated and went up the west side. I just remember seeing scores and scores of police and firemen all rushing in the opposite direction towards the towers, which I felt were just about to collapse. It's my overriding memory - all those people heading for almost certain death.'

RICHARD THOMASON
chief executive, Jarvis Hotels
'I was flying back from Miami to London and early in the morning we flew over New York - the pilot pointed it out. The Virgin flight got into London. I made the decision to stay up all day and go to bed at normal time to avoid jet lag. I went home, turned on the TV and thought I was watching a movie. It's a cliche now but I really thought that. There was about 24 hours of coming to terms with it, and the next day I was in with the team working out a short-term strategy, what the effect would be. We didn't realise that London would be as busy as it was. But you do realise when world events are going to have an effect on your business.'