Yesterday we looked at the risks of a co-ordinated cyber-attack, and this leads us on to what kind of impact a cyber-attack might have on the global economy. The first thing to note is that it would be a supply-side shock, says Capital Economics' senior economic adviser Vicky Redwood.
In the pre-industrial economy, supply-side shocks – like poor harvests, wars or disease – were the source of virtually all downturns. As the global economy became more industrialised, demand-side shocks became more commonplace – often via credit contractions and falling asset prices – and the magnitude of supply-side shocks diminished.
Indeed, few of the supply-side shocks seen have had truly global ramifications. “Instead, they have tended to be quite local in their effects – for example reflecting local natural disasters, weather conditions or regional wars,” says Redwood.
As a result, it’s difficult to foresee just how much of an impact a technological shock would have on the global economy. Three examples of global supply shocks come in the form of world wars, oil price shocks in the 1970s and 1980s, and weather shocks.
All three caused disruption to both global trade and global GDP, but also had an impact on the demand side, too – both positive and negative. “For example, wars have caused the destruction of capital and people, but have also led to a rise in government spending which boosted demand,” Redwood explains.
A cyber-attack on all key infrastructure would have the potential to bring economies to a complete halt. “This could bring economies to a complete halt, as no-one would be able to get to work, there would be no power for factories, etc. The immediate hit to confidence would presumably be large,” she says.
Potentially the most serious scenario Redwood outlines is a cyber-attack on a bank in the form of a large theft from a systematically important institution. That could lead to a loss of faith in the financial system and widespread bank runs.
“One lesson from the global financial crisis is that a shock can affect the financial sector’s plumbing in ways that are difficult to anticipate, and if that leads to a collapse of counterparty confidence, then problems spread quickly.”
Government Debt at High Levels
While policymakers would likely step in quickly to provide extra liquidity to banks and guarantee people’s bank deposits, Government debt levels are currently at “uncomfortably high levels in many cases”. As a result, the public might question whether governments had the money to back up the guarantees and still choose to pull their cash out.
Indeed, Redwood continues, should a cyber-attack happen at a time when financial assets were looking overvalued, then it is plausible it could be the root of the next financial crisis.
If the most extreme scenario came about, contingency plans that have been put in place to cope with a temporary glitch could prove inadequate. “What’s more, it if led to retaliation against the saboteur, then the incident could escalate and we could end up in a world war.” This, of course, could have major economic ramifications.
If the disruption continued for more than a few days, the economic damage could be vast. “Businesses that were already on the edge might go bankrupt. They would then fail to repay bank loans so banks would suffer losses and cut back lending. And the economy could quickly spiral downwards.”
Some Governments – the US and UK in particular – have been proactive in preparing for these eventualities, Redwood soothes. Indeed, “the greatest preparation appears to have taken place in the financial sector”. The Bank of England’s Financial Policy Committee has introduced stress tests of UK banks in the event of a cyber-attack.
Of course, this is all speculation and may never happen. Still, it pays to keep watch just in case.
