www.businessweek.com MARCH 24, 2003

For months, economists, policymakers, and investors have been pinning their hopes on the belief that war is the biggest impediment to the economy's recovery. The general view: Once the uncertainties surrounding the runup to war are past, a quick victory in Iraq will bring a surge in demand that will boost output, business investment, and stock prices in a reprise of the aftermath of the 1991 Gulf War.

They don't believe that anymore. Hopes for a post-Iraq rebound are fading fast, and so are forecasts that the second half of 2003 will bring a jump in jobs, orders, and profits. "I retain that hope, but not the expectation," says Michael J. Birck, CEO of Chicago-based telecommunications-equipment supplier Tellabs (TLABS ). Indeed, from high tech and retailing to financial services and autos, executives are throwing in the towel on the second half.

Why the new doubts? As anxiety over the wait for war climbs with every delay, the looming confrontation with Iraq is combining with a myriad of economic disappointments to dampen prospects. For starters, the Administration's tax plan is losing momentum. With the White House economic team struggling to sell it in the face of criticism of the big deficits it would produce, whatever stimulus plan is eventually passed will likely be far smaller than what the President originally proposed. Oil prices have also been driven up by a risky combination of war jitters and low inventories caused by production disruptions in Venezuela. The sky-high prices are already hurting the economy and look increasingly likely to dampen growth at least through the summer.

It gets worse. On Mar. 7, the monthly employment report released by the Labor Dept. showed businesses cutting a stunning 308,000 jobs in February. Even officials at the Federal Reserve were surprised by the size of the layoffs. The huge dropoff could not be explained by cold weather and the call-up of military reservists. Fed Chairman Alan Greenspan is still betting that "geopolitical uncertainties" are holding back demand. But other Fed officials are now fretting that businesses are just using the war as an excuse for inaction and that the economy is still struggling with excesses of the 1990s boom. Fed-watchers now believe that at a scheduled Mar. 18 meeting, policymakers will at a minimum shift their official view of the outlook to reflect the greater weakness in the economy. That's often a precursor to a rate cut, and some economists think the Fed could even cut rates at the meeting.

While lower rates would normally help the economy, many economists are nonetheless revising down their forecasts. The Mar. 10 Blue Chip Economic Indicators shows a consensus of economists expect the economy will grow 2.6% for 2003, down from the 2.8% expected as recently as January. Wall Street, too, is ratcheting down expectations. Since January, analyst estimates for third-quarter profits growth have been cut by two percentage points for companies in the Standard & Poor's 500-stock Index, according to Thomson First Call.

The new list of worries joins a host of structural economic woes. "If you woke up tomorrow and found Saddam was gone, you might get a huge relief rally," says Ed McKelvey, senior economist at Goldman, Sachs & Co. "But then after the visceral response, you would still be back facing the same problems."

McKelvey and others point to daunting problems of overcapacity, rising consumer and business debt, as well as the expectation that there's little further lift ahead from housing. In addition, the lack of pricing power, increased foreign competition, and refunding of pension plans at the expense of earnings still hang over the business sector.

That's not to say that the war isn't a huge factor holding down the economy. The endless talk of conflict has already done much damage. The Administration may have goofed when it began beating the drums last fall. Front-page headlines and Sunday talk shows made war seem imminent and increased uncertainty.

But seven months have passed, and the prolonged wait has given executives a reason not to tackle long-standing problems or to commit to new projects. With drags like excess capacity and weak foreign demand still hanging over the economy, any postwar rally in the stock market and consumer demand could soon peter out.

Patrick J. Moore, head of corrugated boxmaker Smurfit-Stone Container Corp. (SSCC ), is one CEO who thinks the effect of anxiety on the economy is overblown and that other factors will keep second-half growth low. He points to foreign competition as the primary obstacle for U.S. manufacturers. Because of the dollar's 41% rise against a trade-weighted basket of currencies from 1995 to early 2002, he says they simply cannot match foreign prices. So they're relocating overseas. Even a short war won't stop that migration, Moore says.

Overcapacity is another long-term drag that will still be around even if Saddam isn't. The industrial sector is using only 75% of its available capacity, and some sectors, like telecom, will be dealing with excess for years. John W. Rowe, CEO of electric company Exelon Corp. (EXC ), thinks the consolidation process is only halfway done: "It's a classic case of what you have to do to work off the after-effects of a bubble."

The excesses aren't just about building and equipment. With no signs of an uptick in the markets, Wall Street is planning more layoffs this year. At its peak in 2000, the securities industry employed 783,000 people; by the end of 2002, the head count was down to 708,000. Compensation consultant Alan Johnson of Johnson Associates expects payrolls to be slashed 10% more this year, with major firms starting to lay off people in May and June.

Rising unemployment and income-tax losses will put a further squeeze on state and local budgets in the second half. Worse, the dragged-out war process could threaten the tax cuts expected from Washington this summer. "War could preoccupy policymakers and tend to push back talks about the tax plan," says Goldman's McKelvey. A delayed tax plan could be the final blow to the consumer sector. The steep February drop in confidence suggests consumers are getting tired. Beside job worries and terrorism fears, higher fuel prices are cutting into household budgets.

A consumer retrenchment is the last thing the economy can handle. And it would hit autos particularly hard. Sales of cars and light trucks were waning before the February blizzard blew across the East Coast during the important Presidents' Day weekend. Now, both General Motors (GM ) and Toyota (TM ) are cutting second-quarter production, with Ford (F ) expected to follow suit. Second-half plans could be trimmed as well, especially since zero-percent financing has lost its novelty. More important, the key difference between the spending rebound following the 1991 Gulf War and this time out is the prospect of more terrorist attacks on U.S. soil. That could keep families at home, with their bottled water and duct tape.

Further out, the economy will have to digest enormous federal budget deficits, stemming from tax cuts and government spending boosted by the cost of war and rebuilding in Iraq. That threatens to crimp private investment and lift borrowing costs.

For now, the hope remains for a rapid and successful war with Iraq. Yet even the best of scenarios gives no guarantee that the economy, still struggling under the excesses of the 1990s, will benefit much from a postwar bounce.

biz.thestar.com.my BY KATHY FONG

GOLD and crude oil prices spiked up again but the US dollar lost strength in Asia yesterday as fears of an impending war loomed after the United States hardened its resolve to launch a military attack against Iraq.

The spot gold price was up US$5.60 at US$339.80 per ounce in late Asian trading after hitting a high of US$345.

The precious metal had fallen back to US$334.20 last Thursday on expectations of a delay in military action against Iraq, after peaking at a 6½ year high of US$388.50 on Feb 4 when investors flocked to the traditional safe haven.

Tokyo gold futures went limit-up yesterday morning after Wa- shington gave only 24 hours for the United Nations to find a diplomatic end to the Iraq crisis.

Crude oil prices also rose sharply on the threat of imminent war. The strong buying interest was fuelled by worries that military action in the Gulf would disrupt supplies from other oil producers in the Middle East, which account for about 40% of global crude exports.

In Asia trading, Brent crude was up US$1.25 to US$31.42 per barrel yesterday, while US light crude leapt US$1.26 to US$36.64.

US light crude had jumped to a 12-year peak of US$39.99 a barrel in February, only US$1.16 shy of the record high struck in October 1990 in the build-up to the first Gulf war.

However, Kuwait's acting oil minister Sheikh Ahmad al-Fahad al-Sabah said on Sunday that the country would try to keep its main northern oilfields, which produced about 400,000 barrels per day (bpd), running in the event of war.

Kuwait has already closed two small fields on the Iraqi border, Abdali and Ratqa, which have a combined production of 35,000 bpd. The country currently produces nearly 2.4 million bpd.

Venezuela, the world's fifth largest oil exporting country, has also assured that it could raise production should the Or- ganisation of Petroleum Exporting Countries (Opec) decide to pump more oil into the market in the event of war.

Opec, which controls 60% of world crude exports, pledged last week to provide adequate supplies if a war against Iraq makes the move necessary.

However, the expectation of an imminent war applied downward pressures on the US dollar as investors' reluctance to hold US assets resurfaced.

The yen was quoted at 117.79 to the US dollar yesterday compared with 118.23 last Friday in New York.

The euro rose to US$1.0791 from US$1.0739, while the Ausralian dollar strengthened to 60 US cent from 0.5947 US cent.

But the British pound continued to soften against the US dollar. The currency was quoted at US$1.5814 yesterday compared with US$1.5832 last Friday.

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www.forbes.com Reuters, 03.17.03, 2:56 PM ET

NEW YORK (Reuters) - NYMEX crude oil futures pared steep losses but still ending sharply lower for a third day in a row on Monday as traders speculated that an imminent war with Iraq would be short.

The likelihood that the United States will act quickly to release oil from its strategic reservevs to offset any supply shortage from the Gulf region also helped pull down prices.

In volatile trading, NYMEX April crude last traded 43 cents lower at $34.95 a barrel, extending losses in the past three sessions to $2.88 or 7.6 percent.

In a roller-coaster move, it moved in a $2.35 range, shooting up to $36.35 and just as quickly diving to $34 in the morning.

Nearby May was last traded down 76 cents at $32.60 and June down 86 at $31.10.

"The market psychology has palpably changed and the urgency to buy has disappeared," said Peter Beutel, president of Cameron Hanover, an oil trading consultant in New Canaan, Connecticut.

In London, Brent crude's new prompt month May last traded 65 cents lower at $29.48.

The United States, Britain and Spain ended Monday morning diplomatic efforts to win U.N. approval for an ultimatum to Iraq to disarm or face war. That, analysts said, now clears the way for the three countries to launch a war without a vote in the Security Council.

France, which has led opposition in the U.N. Security Council on a U.S.-British-Spanish resolution that would allow Iraq a final chance to disarm, said the move was not justified. Russia, which is also against the resolution, said any resort to force would be both a mistake and illegal.

U.N. Secretary General Kofi Annan has ordered the pullout of U.N. staff from Iraq and that all U.N. work in the country, including the oil-for-food program, would be suspended.

U.N. arms inspectors were packing their bags and were expected to leave Baghdad early Tuesday, a diplomat in Baghdad told Reuters.

The impetus to remove inspectors followed an ultimatum from Bush on Sunday that the U.N. Security Council had just one more day to give its blessing to a resolution sanctioning the use of force to rid Iraq of suspected weapons of mass destruction.

The U.S. has vowed to lead a coalition to disarm Saddam, who it accuses of violating U.N. disarmament resolutions, with or without U.N. support. More than 250,000 American and British troops are already poised to attack if the signal is given.

Bush will deliver a television message at 8:00 p.m. EST in which he is expected to make a final ultimatum to Iraqi President Saddam Hussein to leave or face invasion.

Monday afternoon, Iraq rejected the U.S. ultimatum.

The U.S. has yet to decide whether it would tap its 600-million-barrel Strategic Petroleum Reserve to stabilize domestic supply once Iraqi oil exports stop flowing, the U.S. Department of Energy said.

U.S. Rep. Bill Tauzin of Louisiana, the Republican chairman of the House Energy and Commerce Committee, said earlier that the reserves had been switched to "flow mode" and were prepared to be put in the market if ordered by Bush.

Iraq currently exports about 1.7 million barrels per day (bpd) of crude under U.N. supervision as part of sanctions in place following Iraq's invasion of Kuwait in 1990. Last January, Iraq sold about 600,000 bpd to the United States.

On Monday, the U.N.-supervised Iraqi oil exports were at a standstill and will likely stay that way until after a U.S.-led assault, which is now expected imminently, trade and U.N. sources said.

Iraq's oil exports will be halted indefinitely once U.N. oil export inspectors are evacuated, which is expected to coincide with the pullout of U.N. arms inspectors by Tuesday.

Saddam said early Monday that while Iraq had weapons of mass destruction in the past, it no longer had them.

The day's prices have erased about $5.50, or nearly 14 percent, since NYMEX crude hit a 12-year high of $39.99 on Feb. 27. From mid-November to that high point, NYMEX crude prices had built up more than $15, or 60 percent, about half of which was seen as a war premium amid fears of supply disruptions that a war with Iraq would entail.

Crude prices also rose as U.S. supplies thinned due to a crippling two-month strike in Venezuela backed by its oil workers that began Dec. 2. Venezuela's production is gradually being restored.

Crude futures jumped to an all time high of $41.15 in October 1990 after Iraq invaded Kuwait in August of that year.

Meanwhile, NYMEX refined product futures tumbled sharply, moving with crude.

April gasoline futures last traded 1.74 cents down at $1.023 a gallon while April heating oil futures last traded 2.67 cents lower at 91.40 cents a gallon.

reuters.com Mon March 17, 2003 10:33 AM ET By Alister Bull, European Economics Correspondent

FRANKFURT, March 17 (Reuters) - A second Gulf War could trigger recession in the euro zone, European officials said on Monday as markets braced for an imminent invasion of Iraq.

Central banks in Germany and Italy warned that the global economy was being harmed by the tension and the European Commission said a lasting spike in oil prices could heap more damage on the spluttering euro zone economy.

"A stagnation or even a recession in the euro area cannot be excluded," the Commission said in its 'worst-case' assessment of what a U.S.-led attack on Iraq could mean for the euro zone.

It has also almost halved its estimates for euro zone growth in 2003 and says hopes for a recovery next year depend on the uncertainty around Iraq being dispersed.

As a result, the Commission now expects only around one percent growth this year, from 1.8 percent forecast back in November, and that is before the fallout of a war is felt.

Countdown to the conflict is being figured in hours, not days after U.S. President George W. Bush told Iraq on Sunday it faced a 'moment of truth' and the United Nations was advised to pull its weapons inspectors out of the country.

The Bundesbank said in its monthly report on Monday that the tensions were taking a heavy toll and the Italian central bank said a prolonged fight would hit the industrial world hard.

"The rhythm of growth in the principal industrial economies could end up falling, even significantly," it said in a twice-yearly assessment of economic conditions.

Oil is the main channel through which the war will make itself felt in the pockets of the industrial world by cutting consumer spending power, although lower business and household confidence and international trade can make matters worse.

SHORT WAR GOOD

Klaus Regling, head of the European Commission's economics department, told a news conference in Brussels that a swift war would have only relatively mild implications for growth.

Outlining this benign scenario, the Commission reckoned oil prices would peak at $50 per barrel during a quick war, but be back to around $26 per barrel by the third quarter of 2003 and this would cost less than 0.1 percentage points in GDP growth.

This mirrored the experience of Gulf War One, when allies evicted Iraq from Kuwait in January, 1991 in ground fighting which was over in a matter of days and oil prices fell under $20 per barrel after peaking around $40/barrel.

Unfortunately, this time around the euro zone economy is in a much more fragile state. Germany is tilting towards another recession and business and consumer confidence has already been mauled by the steepest stock market losses for 70 years.

LONG WAR BAD

"Given that the political and economic situation currently appears more precarious than in 1990-1991, a more substantial and lasting impact on confidence is also possible," the Commission said in its quarterly economic report.

Plus, the state of world oil supplies is also much tighter following a strike in Venezuela and recent cold weather, which could prevent a repeat of 1991.

As a result, if the damage done to world oil supplies turned out to be more serious, oil prices could spike to $70 per barrel and stay high for much longer.

If this translated into a more or less permanent increase in the price of oil, the Commission estimates that the damage to growth could be up to 0.8 percentage points of GDP over the next two to three years.

"In the worst-case scenario we assume a sharp deterioration of confidence, a higher risk premium and further declines in equity markets. A negative impact on world trade, global capital flows, investment and tourism also cannot be excluded," he said.

www.nationalpost.com Paul Vieira Financial Post

The combination of higher interest rates, soaring energy prices and a stronger dollar are each contributing to pessimism among Canada's business leaders over the country's economic fortunes, a survey suggests.

About 60% of corporate executives indicated in the latest instalment of the Financial Post's CEO poll that the combination of the three will have a negative impact on the Canadian economy, compared to 20% who suggested a positive effect. The remainder said either there would be no material impact (17%) or did not know (3%).

"There was some concern -- about interest rates, oil prices, and in that context, the Canadian dollar," said Conrad Winn, president of COMPAS Inc., which conducted the poll.

"And in the context where oil prices will impact on the American economy, and therefore, by inference, on the Canadian economy, rising interest rates and a rising Canadian dollar would not be helpful, because we rely on the U.S. market so much for exports."

New data released late last week suggest the U.S. economy is facing renewed difficulties, as U.S. consumer confidence hit its lowest level in more than a decade and the country's producer price index climbed 1% in February, largely due to increasing energy costs.

Canadian chief executives are most concerned about the potential drag that high oil prices and interest rates will have on the economy.

The price of a barrel of West Texas intermediate crude has recently reached heights not seen since the Persian Gulf war of the early 1990s, largely because of a strike in Venezuela and possible military action in Iraq.

Of the business executives surveyed, 68% suggested rising energy costs would have a negative impact on the economy, compared to 13% who said it would be a positive, given Canada's energy-rich economy.

Said one respondent: "Care should be taken not to assume that economic benefits flowing from rising energy prices ... will necessarily offset more immediate and negative effects of higher energy prices on the majority of Canadian businesses, whether in the form of higher production costs or simply as consumers shift more of the disposable dollars in their pockets" from buying goods to paying higher energy bills.

Also, CEOs expressed concern over the Bank of Canada's recent move to increase interest rates.

About 58% of business leaders said raising interest rates would have a negative effect on corporate performance, with only 14% saying it would be positive.

This month, David Dodge, the central bank governor, raised the bank rate, the interest rate it charges commercial banks, to 3.25% from 3%, in an attempt to cool inflation.

Moreover, the central bank said further increase are on the way, even though there are worries about a slowing economy and a possible war in Iraq.

The increase in interest rates, and the overall performance of the Canadian economy, has helped push the country's dollar upward. But that is of concern to CEOs as well, given export-oriented companies benefited from a low loonie.

"A reasonable inference is that a stronger dollar, on its own, is not enough to instill confidence in business leaders," Mr. Winn said. "The underlying economic circumstances appear to be as important to fostering confidence as the performance of the dollar itself."

The Web-based survey of CEOs, sponsored by the Canadian Chamber of Commerce, was conducted between March 11 and 13 and involved 155 business leaders. This study of Canadian business leaders is considered more accurate by COMPAS than other surveys of the same size, as it is drawn from a smaller community., Similar surveys of 155 respondents drawn from the general public are deemed accurate to within approximately eight percentage points, 19 times out of 20.

FP CEO POLL:

• Some economists have been forecasting near-term growth in energy-rich provinces as a result of rising energy prices. To what extent are rising energy costs affecting business positively or negatively? Please use a 7-point scale where 7 means very positively and 1 the opposite.

Very positively 7 6 5 4 3 2 1 DNK Very negatively

7: n/a 6: 5% 5: 7% 4: 15% 3: 32% 2: 27% 1: 9%

DNK: 5%

• The Bank of Canada is raising interest rates out of concern about rising energy costs and possible inflation. How will rising rates impact corporate performance? Please use a 7-point scale where 7 means very positively and 1 the opposite.

Very positively 7 6 5 4 3 2 1 DNK Very negatively

7: n/a 6: 3% 5: 10% 4: 22% 3: 33% 2: 19% 1: 6%

DNK: 7%

• The Bank of Canada predicts that the loonie will rise against

the U.S. dollar as a result of the increase in interest rates. How will the combination of a stronger dollar, higher energy prices, and higher interest rates impact the Canadian economy? Please use a 7-point scale where 7 means very positively and 1 the opposite.

Very positively 7 6 5 4 3 2 1 DNK Very negatively

7: 4% 6: 3% 5: 13% 4: 17% 3: 29% 2: 19% 1: 12%

DNK: 3%

• There are various opinions about why our dollar is strengthening. Which of the following opinions best describes your view:

Our dollar is rising because of our inherently strong economy. 32%

Our dollar is strengthening because we are an energy-rich country and this is a time of Middle East-related uncertainty. 31%

Our dollar has been historically undervalued and only now does the market realize its true value. 30%

Quebec and national unity are less of a concern today so the market is recognizing our domestic stability. 3%

DNK/No opinion 3%

The full technical report and data not graphically displayed above are available at www.compas.ca. Letters on the substance of the issue are welcome at letters@nationalpost.com, while letters on survey methodology are welcome at National_Post_Survey@compas.ca

Source: COMPAS Inc., National Post

pvieira@nationalpost.com; The analysis in the poll is that of COMPAS. Those views are not necessarily held by the poll's sponsor, the Canadian Chamber of Commerce. This weekly poll is presented in partnership with Canadian Chamber of Commerce