LONDON – Britain's economy is resilient enough to absorb the shock of a terrorist attack on its transportation system, economists said, a sentiment seen Friday as markets throughout Europe shrugged off much of their losses from a day earlier.
Traders were unwinding the "safe haven" moves they had made a day earlier upon news of the explosions, said Phillip Shaw, chief economist at Investec in London.
The London Stock Exchange's (search) key index, the FTSE 100 (search), rose 63.43 points to 5,221.70 in afternoon trading, around its level before the blasts Thursday morning. The index had closed at 5,229.6 on Wednesday. Germany's DAX was up 0.8 percent at 4,564.91, and in Paris, the CAC 40 benchmark was up 1.4 percent to 4,279.37.
"Although I think we will see more volatility today, I can't help feeling that the worst is over for now," said Tom Hougaard, chief market strategist at City Index. "We had an ugly day which will be with us forever, but the markets are intact and look defiant."
Economists pointed to the adaptability of the U.S. and Spanish economies after the Sept. 11, 2001, terrorist attacks and the March 2004 train blast in Madrid as encouragement for Britain. A key factor in both those recoveries was that the attacks were not followed by more.
"If the attacks (in London) turn out to be isolated, then calm should return quickly," economists at Goldman Sachs U.S. Economics Research wrote in an analysis. "That is what transpired following the Madrid train bombings."
Analysts said the biggest risk to Britain's economic outlook from Thursday's attacks on the Underground rail system and London's bus network, which killed dozens and injured hundreds more, was the impact on consumer confidence.
Shaw said it was "very, very early days to gauge," but there was little doubt that sectors such as transportation, services and tourism would be hit in the short term.
Insurance and travel-related stocks were among the hardest hit in the initial market slide Thursday. But on Friday, British Airways shares rose 1.9 percent to 265.75 pence ($4.61) after falling more than 4 percent a day earlier. Hotels group Hilton was steady at 288.5 pence ($5.01) after a drop of 3.3 percent.
The British pound, sent to a 19-month low on Thursday, fell even further Friday to $1.7356 from $1.7425 in late New York trading a day before.
Analysts said the hit to consumer confidence would be problematic because the British economy had already been showing signs of slowing. Major retailers have reported poor sales since the end of last year and the previously buoyant housing market showed signs of heading for a slump. In the first quarter of this year, growth in Britain lagged the euro region for the first time since 2001.
Shaw said the terrorist attacks — and fewer shoppers in coming days and weeks — would support a growing consensus that the Bank of England (search) will cut interest rates by a quarter of a percentage point when it meets again next month. The bank kept rates steady when it went ahead with its meeting Thursday amid the fallout of the terrorist attacks.
RBS Financial Markets said a previous forecast of economic growth of 0.5 percent to 0.6 percent in the July-to-September period could now be too high, and that the risks to its moderate prediction of 2 percent annual growth are on the downside.