The Iraq Conflict: Will the Global Economy Be Caught in the Crossfire? Analysis ; A Short, Successful War Would Be Less of a Plus to the World's Economy Than a Long, Drawn-Out One Would Be an Economic Minus

By McRAE, Hamish | The Independent (London, England), March 26, 2003 | Go to article overview
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The Iraq Conflict: Will the Global Economy Be Caught in the Crossfire? Analysis ; A Short, Successful War Would Be Less of a Plus to the World's Economy Than a Long, Drawn-Out One Would Be an Economic Minus


McRAE, Hamish, The Independent (London, England)


The cost of the war in Iraq is clearly substantial and the cost of reconstruction will be even greater. But we are just beginning to see that both these costs could be dwarfed by the impact - either way - that the war is having on confidence in the world economy as a whole.

If the conflict continues to proceed to plan, as Tony Blair yesterday said it was doing, and there were a reasonably swift conclusion, then the scope for recovery is obvious. We saw the way the markets responded last week to what seems like good news from the Middle East. Shares rose, the oil price fell. But the wobble on the markets this week pointed to the dangers were hostilities to continue for long: a fall in confidence that at worst pushes the world economy back into recession.

The first financial bills for the war are now being presented. George Bush has asked Congress for $75bn (pounds 48bn) in emergency funding, of which $63bn is for the military, most of the rest for additional foreign aid. This sum is based on the assumption of six months of military involvement in Iraq and some initial reconstruction. But it does not take into account the much more substantial sums that will have to be spent over the next three to five years if the economy is to start to perform to its potential, as the British Prime Minister suggested was the coalition's aim.

Figures for the cost of that are pretty much guesswork but for what it is worth, sums as high as $300bn have been quoted. To put that into perspective, that would be equivalent to 3 per cent of US GDP or 20 per cent of UK GDP.

Of course such funding would be widely spread and not all of the money by any means would have to come from outside investors. A resumption of oil production at pre-1990 levels would help, for Iraq is potentially a producer almost on the scale of Saudi Arabia. So the $75bn of military costs has to come out of the US taxpayers' pockets, but the $300bn (or whatever) for reconstruction will come from every country in the world that feels it has an economic interest in the future Iraq. There are of a lot of those.

But the wild swings of mood in the markets over the past few days point to the brittle nature of confidence in the world economy.

Cast your eye down the run of the economic news that is coming out at the moment. Crude oil prices rose for the second day running. The dollar fell for the second day, the biggest two-day drop since last July. Last month French shoppers cut their spending by 0.5 per cent. Italian businesses became more pessimistic about the outlook. The German Ifo survey of business expectations comes out today and is expected to fall back too. New figures showed US consumer confidence the lowest for almost a decade.

All this has led some forecasters - for example yesterday the chief economist of Morgan Stanley in New York - to warn of recession in the United States, continental Europe and Japan. That is close to three-quarters of the world economy. The rest - China, India, the few developed countries still producing decent growth (including possibly the UK), Russia and the like - simply are not big enough to pull the show along.

The next few days are of course hugely important in military terms, for they may determine whether there will indeed be a swift end to the shooting part of the war or whether the allies will become bogged down. Which way that turns will naturally have a seminal influence on confidence and hence on the likelihood of recession.

But I have to make a worrying qualification. There is an asymmetry here. A successful war would be less of a plus to the world economy than a bogged- down one would be a minus.

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The Iraq Conflict: Will the Global Economy Be Caught in the Crossfire? Analysis ; A Short, Successful War Would Be Less of a Plus to the World's Economy Than a Long, Drawn-Out One Would Be an Economic Minus
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