Banker says war will make economy sink or swim - Citizens senior v-p watching oil price

www.barnstablepatriot.com By Edward F. Maroney

WAR CLOUDS FORECAST Maureen Kelliher, senior vice president of Citizens Bank, told Cape Cod Chamber of Commerce members Wednesday that the duration of a possible war with Iraq will determine the health of the American economy.

Wondering if the U.S. will take on Saddam Hussein in the next few weeks? Look to the oil strike in South America for the answer.

"My sense is that we cannot go to war until Venezuela comes back on line," said Maureen Kelliher, senior vice president of Citizens Bank, in an address to the Cape Cod Chamber of Commerce Wednesday on the economic outlook for 2003.

Drawing on the analysis of economists at the Royal Bank of Scotland, which owns Citizens, Kelliher said hopes for a full recovery from the recession ride on the duration of a potential war with Iraq.

One factor in determining the health of a country's economy is the status of its gross domestic product, or GDP. Kelliher tied that statistic to the price of oil.

"Every dollar above $26 per barrel drains $5 billion from the GDP," she said, adding that the price is fluctuating between $34 and $37.

Kelliher said there are three scenarios the American economy can follows in 2003. One envisions not going to war or staging a quick and successful campaign in Iraq. "If the conflict subsides quickly, the economy will return to growth in the second quarter," the banker said.

If the price of oil remains high (one of the "economic headwinds" she cited), Kelliher predicted a "flat to slightly positive GDP."

The third scenario envisions a prolonged war in Iraq with a concomitant loss of consumer confidence in the U.S. and a sharp climb in oil prices resulting in what Kelliher called "a double-dip recession."

Consumer spending has been the engine keeping the economy inching forward, according to the banker, who noted that the latest surveys find a decline in consumer confidence. She said the economy grew 2.8 percent last year in spite of big stories about corporate malfeasance and high-profile bankruptcies coupled with geopolitical jitters.

One saving grace, she noted, was that the cheating and failures of some companies "didn't have a lot of domino effect" on the rest of the economy.

The "truly robust housing market" continues to help, Kelliher said. She said she expects remortgaging activity to continue at its fast pace in 2003. "There's a lot of pent-up opportunity for the consumer to reduce his costs and strengthen his balance sheet," she said.

Asked whether technology stocks will rebound, Kelliher said corporate expenditures preparing for the Year 2000 computer conversions pushed up the value of such companies. "The problem," she said, "was that there was no Y2K (disaster)." Nevertheless, she expects a "small echo boom" as companies prepare to replace outdated information technology.

Chamber Offers Look at Fourth Quarter

The Chamber used the occasion to issue its fourth quarter economic update, which showed a 6 percent increase in state and local room tax revenue over the last three months of 2001.

A statistic based on use of one (unnamed) major credit card showed a 13 percent increase in credit charges, with the greatest jump coming in fuel products. Total transactions with the card in department stores were off 3 percent.

The number of single-family homes sold increased 5 percent over the same quarter in 2001, but the average sales price jumped 25 percent, from $275,845 to $344,497.

Visits to the Chamber's visitor centers and to Cape Cod National Seashore areas increased 4 percent.

Wendy Northcross, the Chamber's CEO, said Citizens Bank will sponsor the quarterly economic update this year.