The horrific events in New York and Washington last week will undoubtedly have long-lasting political, social and financial reverberations. However, this column is concerned with the financial implications and, at the time of writing, the US stock market had completed its first day of trading following its unprecedented four-day shutdown.

Despite some speculation of a patriotic rally, the major US stock market indices declined by between 5 per cent and 7 per cent on the day in huge volumes.

While there may have been disappointment in some quarters at the extent of these share price declines, the most significant and heartening aspect of the day's trading was that the US exchanges back-up systems worked smoothly and coped with record trading volumes. At the end of the day, the stock market was seen to have functioned smoothly and performed its function of adjusting asset values to unfolding events in a rational fashion.

The accompanying table shows the extent of declines in the main stock market indices from the end of August to September 17th. The remarkable feature of the data is that the declines across all of these indices have been so closely aligned. The ISEQ, Dow Jones and FTSE Eurotop300 had all declined by between 10 per cent and 11 per cent in the weeks to September 17th.

This probably provides some support for the view that share prices have now discounted the immediate shock to the system after the terrorist attacks. The risk premium that investors require to hold risky assets, such as company shares, has risen, implying lower share prices.

In the short term, an above normal level of day-to-day volatility is likely to continue to be a feature of stock markets, depending on the unfolding political and military reaction to these terrorist attacks. However, the future direction of share prices will depend on the fundamental performance of the global economy.

Prior to the events of September 11th, the weight of unfolding economic data in the US was increasingly pointing towards an economic recession. Signs of erosion in consumer confidence were growing, suggesting that recessionary conditions were likely in any event.

Likewise, economic conditions in Europe had been weakening for several months, while Japan and much of the Far East are probably already in recession.

The events of last week could be viewed as merely changing the timing and pattern of a global recession. On this view, an inevitable global recession will now occur sooner but the eventual recovery will also occur sooner due to a much more aggressive response from central bankers.

An indication of how swift and decisive this response is likely to continue to be was clearly demonstrated by the action of both the Federal Reserve and the European Central Bank to each cut interest rates by half a percentage point on Monday last.

Further interest rate reductions in coming months are probably now a foregone conclusion. The hope must be that much lower interest rates will stimulate economic recovery by about the middle of next year.

In this scenario, the broad world economy is likely to adjust to the after shocks of last week's events very quickly.

Unfortunately, this probably represents too sanguine a view, given that several sectors of the global economy are likely to be hit very hard in coming months. The impact on the airline and tourism sectors has been instant, and several airlines across the United States and Europe are likely to go out of business.

Heightened uncertainty is likely to cause many global companies to postpone or even cancel planned investment programmes.

The prospects for the Irish economy have undoubtedly deteriorated in the aftermath of this terrible atrocity. The negative impact on the tourism sector is obvious and a sharp fall-off in American visitors over the next 12 months seems inevitable.

A greater threat to the economy comes from the impact that a US recession may have on the Irish operations of US multinationals. The risk that the Irish economy will have to endure a hard landing after its incredible economic boom is now ominously high. This will inevitably impact on the ISEQ and stockbroking analysts must be carefully reviewing their forecasts of corporate profits.

Lower interest rates will have a positive impact and the medium-term prospects for the Irish economy are sound. Nevertheless, the economy seems destined to be confronted with a harsh economic and financial climate for the immediate future.