ECONOMIC ANALYSIS: War in Iraq Could Bring U.S. Recession, or Economic Growth

<a href=www.nytimes.com>Concerns About Economy And War By DANIEL ALTMAN

epending on the outcome of the war in Iraq, its impact on the economy could range from a recession to a mild stimulant.

The early indications for the economy, as for the war, had been good. Yesterday, however, a touch of trepidation dampened the mood.

"On Friday, when everyone went home for the weekend, there was a degree of euphoria," said Henry G. Willmore, the chief United States economist at Barclays Capital. "There's been a bit of reassessment given the events over the weekend." Yet he added that since a week ago last night, when President Bush announced the 48-hour deadline for Saddam Hussein to leave Iraq, "we've still had significant declines in oil prices and the stock market is up."

For months, expert studies have predicted that a brisk campaign followed by total victory would lead to lower oil prices and increased consumer confidence. In addition, the removal of uncertainty could help some businesses to make investment decisions. Even in the best case, though, some side effects — from higher mortgage rates to deepening government deficits — could shave off part of the economy's gains.

That best case would help to offset what has so far been a disappointing first quarter. Before the first Tomahawk missile was launched, the uncertainty that preceded the war had already taken a toll.

"In terms of growth in the first half of the year, we're going to be somewhere in the vicinity of 2 percent" at an annual rate, predicted Peter Hooper, the chief United States economist at Deutsche Bank Securities. Without the war-related uncertainty, he said, the economy might have expanded at an annual rate of 3 percent in the first half.

Economists generally agree that the economy needs to grow by at least 3 percent annually in order to improve employment. With growth of just 2 percent, hundreds of thousands of jobs could be lost in a year.

In addition to the stagnating effects of uncertainty, worries about disruptions of oil shipments from the Persian Gulf caused oil prices to rise in the months leading up to the war, putting further pressure on the economy. The strike in Venezuela's oil industry, which has reduced global supply, and now problems in Nigeria make isolating the war's effect on prices difficult.

Edward F. McKelvey, a senior economist at Goldman, Sachs, said that he had heard figures of a $7- to $10-a-barrel price rise in the first quarter of this year. An increase of $10, he said, would cost American consumers about $50 billion a year. Still, he cautioned, "you don't have any really good sense of where the baseline was."

In the first few days of the war, the premium in oil prices had seemed to be vanishing — dropping by Friday to under $27 a barrel from a peak of $39.99 during New York trading on Feb. 27. If that trend held, the war's indirect impact on the economy could be minimal, according to a study by William D. Nordhaus, a professor of economics at Yale. And yet, yesterday, as it appeared that Iraqi resistance might be stiffening, oil prices rose.

In the worst case, a price spike could cost the United States as much as $391 billion over 10 years, Professor Nordhaus wrote. The Center for Strategic and International Studies in Washington forecast that a prolonged war accompanied by serious terrorist attacks could drain $472 billion from the gross domestic product in this year alone, or 4.5 percent. A loss of that magnitude could qualify as another recession.

On the other hand, a successful conclusion to the United States-led invasion could give the economy an immediate shot in the arm for the second half of the year. A report published in November by the center suggested that the economy could gain an extra $52 billion in growth in the best case.

"If we get through this without major damage to Iraqi oil facilities, and without any kind of terrorist action, and relatively quickly on the military front, I would think that would be good for the economy," Mr. Hooper of Deutsche Bank Securities said. "It would be good for the equity market, and it would be good for consumer confidence."

In terms of companies' actions, Mr. Willmore of Barclays said, "quite a few of them have probably postponed making some decisions, so in effect you don't get the investment and the hiring that might be taking place."

Even while euphoria swept the stock market last week, not all of the war's immediate effects on the economy were positive. Since the White House signaled that diplomatic efforts to avert war had run their course, a sell-off in the bond market had been driving yields higher and putting upward pressure on mortgage rates. The bond market did rally yesterday as stocks plunged, but 10-year Treasury yields stayed 0.4 percentage point above the 44-year low reached on March 10.

The direct cost of the war to the federal government, which the White House estimated yesterday at $70 billion to $90 billion, could also hurt the economy, according to some experts. Swelling budget deficits and greater borrowing by the government, they argue, could push up long-term interest rates.

"Those who are writing the federal budget, to be prudent, must factor this in with everything else that they're doing," including fresh tax cuts and a prescription drug benefit for Medicare, said Robert L. Bixby, executive director of the Concord Coalition, a fiscal watchdog group in Washington.

Despite these potential drags, Mr. Willmore said he expected the economy to manage reasonable growth of 3 percent this year, with money from refinancing of mortgages and the tax cuts in the new budget helping to support consumers' spending.

The economy could also benefit to the extent, albeit unknowable, that the war diminishes threats to national security. But in the last few months experts have argued conversely that the war could actually increase the likelihood of terrorist attacks.

In either case, Mr. Hooper warned that the overall outlook was still unclear.

Even "if Iraq is resolved successfully," he said, "there are other potential geopolitical clouds on the horizon."