What Is It Good for? Increasing Uncertainty about a War on Iraq Is Making the Forecaster's Job Even Harder Than Usual, Writes David Ross, but the Underlying Trends in the Fundamental Economic Measures Are Telling. (Economics)

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In February the price of oil went above $30 per barrel, the price of gold surged to a six-year high of over $380 per ounce and the dollar fell to four-year lows against sterling and the euro. On the world's stock markets the FTSE 100 fell for an unprecedented 11 days in succession to stand at its lowest level for more than seven years, while the Dow Jones industrial average index fell below 8,000 for the first time since October 2002.

All this is a result of uncertainty about war with Iraq, but it shouldn't detract from the importance of watching the economic fundamentals. In the UK, gross domestic product growth of O.4 per cent in the fourth quarter was below trend and lower than it had been in the previous two quarters (see graph, below). In 2002 as a whole the economy expanded by 1.7 per cent, its weakest performance in a decade. Consumer demand continued to grow strongly, but manufacturing output plunged into its deepest recession for more than a decade.

Spending by consumers and, to a lesser extent, the government played a large part in keeping the economy afloat last year. In the euro area, where house-price inflation has been modest compared with UK trends, consumers have retrenched and the fiscal authorities have been constrained by the EU's growth and stability pact from increasing their budget deficits. As a result, Germany recorded its lowest growth in a decade (0.2 per cent, while France and Italy performed little better with growth rates of 0.4 per cent and 1 per cent respectively.

The US economy grew by an annual rate of only 0.7 per cent in the fourth quarter of 2002, down from 4 per cent in the third quarter partly as the result of a sharp slowdown in car sales. In January consumer confidence fell to a nine-year low, according to the Conference Board, while business confidence remained weak.

Forecasters are less optimistic than the chancellor about the UK's growth prospects, but all the talk of falling house prices or consumer spending is exaggerated: growth in both will decelerate. …