Will Global Economy Ride Out Turmoil?

WASHINGTON, 26 March 2003 — Worries about a drawn-out US-led war on Iraq halted the recent run-up in stock prices, but whether the global economy can ride out the turmoil may depend on how consumers react to the conflict.

French Finance Minister Francis Mer surprised some private economists by saying on the weekend that “on the economic front, the main part of the negative consequences of the Iraqi crisis is behind us.”

One prominent group of US economists is also guardedly optimistic, even after recent setbacks to the American and British forces in Iraq. “While consumers can’t be the Atlas they once were for the US economy, they still have income,” said Diane Swonk, economist at Bank One in Chicago and a member of the National Association for Business Economics.

The NABE, in a survey released at its meeting, cited the war on Iraq and the threat of terrorist attacks in the United States as two of the greatest risks facing the US economy.

But many forecasters said their best guess was that the economy would pick up later this year. “Most people are moderately positive about the economy, should the war be quick and swift,” Swonk said, adding a “CNN effect” in the early days of the war could keep consumers away from shopping malls and at home, focused on television broadcasts of the conflict in Iraq.

But she emphasized that “short and swift” does not mean a bloodless conflict that lasts only days — a scenario that some optimists in financial markets thought possible as US and British forces rolled swiftly toward Baghdad last week.

President George W. Bush will push for new funding for the war, telling lawmakers he will seek a $74.7 billion emergency funding package for initial costs related to the war.

One US official said war cash could run out by May without new funds. Bush met his economic advisers and Federal Reserve Chairman Alan Greenspan, Treasury Secretary John Snow and National Economic Council Director Stephen Friedman but few details were forthcoming about these Monday meetings.

The budgetary impact of the war as well as Bush’s proposed large tax cut package — that looked on Monday like it had a good chance of passing Congress — has worried some economists who fear higher deficits could drive up interest rates.

Snow acknowledged on Monday that budgetary red ink was “regrettable” but that the current shortfalls were modest relative to gross domestic product. The administration believes the tax cuts will give the US economy a boost which it says may be needed even when war worries lift.

But private economists and many Federal Reserve officials think the removal of those concerns should unleash stronger growth. They are focusing on an “optimistic” scenario of war lasting three to five weeks.

“If, over the next couple of weeks, oil prices come down and stay down and if the US is victorious, I do think the US economy will improve,” said Stuart Hoffman, a NABE member and chief economist with PNC Financial Services in Pittsburgh.

Atlanta Federal Reserve President Jack Guynn said businesses are unlikely to spend while fearful about war complications or possible terror attacks.

“The good news, though, is that once we get beyond some of the current geopolitical uncertainties, the fundamentals of the economy seem poised for a pretty solid recovery,” he added.

As they monitor the global economy’s health, analysts are keeping a wary eye on stock markets, which sank on Monday.

A higher casualty toll over the weekend and grim television footage from Iraq sent US equity prices tumbling more than 3-1/2 percent on Monday. British blue-chips also slipped by more than 3 percent. Paris’s CAC-40 took a pounding as well.

The dollar slipped against major currencies on the dented hopes after hitting two-month highs versus the euro last week.

While investor sentiment has been highly volatile, two big unknowns right now are consumer and business psychology.

Next week should bring some early readings on that.

In Germany, the Ifo index of March business confidence is due today, followed by its French equivalent on Thursday. Ifo’s poll of 7,000 companies closed on March 20, as the world digested the dramatic dawn airstrike on Baghdad, while French companies can still be polled this week.

“Ifo may have caught the early fall in uncertainty as war became imminent and oil prices fell. You don’t know how many respondents waited for the last moment to reply to the poll,” said economist Jean-Francois Mercier at Citibank in London.

The University of Michigan’s final survey of US consumers, due on Friday, will give an update on a preliminary report published earlier this month. That data showed confidence sank to its lowest level in almost 10 years.