WHENEVER anybody gives a view on the prospects for the economy or the markets, there is usually a big caveat attached, along the following lines. If there is another big terrorist attack — which those who are supposed to know say is inevitable for London — all bets are off.

Terrorist anxiety comes in cycles. After the appalling Madrid bombings of March 11, fears of imminent attacks elsewhere have been heightened. That may be illogical — there is no statistical evidence that outrages are bunched (if only because the terrorists may choose to wait until complacency has set in) — but it is understandable.

Economists and market pundits feel obliged to lodge terrorism as a caveat because it is unknowable. Before the September 11, 2001 attacks on America, nobody could have really factored in an attack on that scale. Who knows whether Al-Qaeda or other groups will acquire dirty bombs, or even fully-fledged nuclear weapons? But if we stick to dealing with what we do know, a few things are clear. There is no evidence that the number of international terrorist incidents is increasing. In fact US State Department figures show an average of just over 330 separate terrorist “events” a year between 1998 and 2002, half the annual number in the mid to late 1980s.

There is evidence, on the other hand, that attacks are becoming more deadly. Deaths in the three years 2000, 2001 and 2002 matched those in the previous 14. Whereas in the past terrorists often preferred to destroy the symbols of western prosperity and power, for example by blowing up empty airliners, now they glory in the taking of human life, usually without warning.

Even that would not be a clear-cut conclusion were it not for the huge 9/11 death toll which skewed recent averages upwards. But it is reasonable to operate on the basis that we are dealing with a more callous generation of terrorists than in the past. The 9/11 attacks raised the stakes.

What do we know about the economic effects of terrorism? With the passage of time, many have come to believe, first, that the 9/11 attacks pushed America’s economy into recession and, second, that they gave us the equity bear market.

Neither is true. America’s recession began a year before the terrorist attacks, in the third quarter of 2000. The third quarter of 2001 was, perhaps surprisingly, the last one in which the US economy shrank. America embarked on growth in the fourth quarter of 2001, when the 9/11 shockwaves were compounded by a justified panic over anthrax. Britain grew through the attacks, our gross domestic product rising by 0.3% and 0.4% respectively in the third and fourth quarters of 2001.

This is not to argue that there were no economic effects from terrorism. The airline and tourism industries were hard hit, as was business confidence, leading to a corporate caution that is only now lifting.

But there were also countervailing economic factors. Policymakers responded, while central banks cut interest rates to “emergency” low levels in response to the attacks. Without 9/11 I doubt we would have had a 3.5% base rate in Britain. There was also a big fiscal response, particularly in America. To give an example, the budget of the US Department of Homeland Security jumped 60% to $36 billion (£19.5 billion).

The same was true for the stock market. While the immediate effect of the 9/11 attacks was a slump in share prices — which had already been falling for months — the recovery was quite quick. A bigger and more lasting crisis came when the Enron and WorldCom debacles hit home a few months later. The Private Eye cover that said Osama Bin Laden should have trained as an accountant had a grain of truth.

What about the vulnerability of London, which houses the lion’s share of the financial-services industry, and accounts for nearly a fifth of Britain’s gross domestic product? The lesson of New York was that cities can bounce back quickly.

The future is unknowable, but London has faced terrorism before.

None of this is intended to argue for complacency, merely a bit of perspective. And if economics can help to provide that, it can also provide a way forward in the fight against terrorism. Professor Todd Sandler of the University of Southern California, who last year delivered a Leverhulme globalisation lecture at Nottingham University, is an expert in the economics of terrorism. His latest paper, Controlling Transnational Terrorism: Co-operation Dilemma, sets out a key problem.