Analysts weigh war's impact

Universal Resource Locator Posted on Tue, Mar. 25, 2003 By Daniel Altman NEW YORK TIMES

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

The early indications for the economy, as for the war, had been good. On Monday, 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, chief U.S. economist at Barclays Capital. "There's been a bit of reassessment given the events over the weekend." Still, he added, since a week ago Monday 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.

"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, chief U.S. economist at Deutsche Bank Securities. Without the war-related uncertainty, he said, the economy would probably have been able to expand 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, rising oil prices in the months leading up to the war substantially influenced the economy through a "war premium" caused by worries about disrupted oil shipments from the Persian Gulf. 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, though.

Edward F. McKelvey, a senior economist at Goldman Sachs, said he had heard figures of a $7- to $10-a-barrel premium in the first quarter of this year. A premium of $10, he said, would cost 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. By Friday, the price of crude oil had fallen to about $27 a barrel from a peak of about $38 on March 7. 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 University. And yet, as it appeared that Iraqi resistance to the invasion might be stiffening Monday, oil prices edged back up.

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

Blaming the war for weaker retail sales and a lack of hiring might be a step too far, though, according to McKelvey. "How much of that's war uncertainty, and how much of it's other stuff?" he said. "We would tend to go with other stuff."

On the other hand, a successful conclusion to the U.S.-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 for Strategic and International Studies 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," Hooper said. "It would be good for the equity market, and it would be good for consumer confidence."