- The Washington Times - Monday, January 20, 2003

QUERETARO, Mexico, Jan. 20 (UPI) — "Anything can happen in the next half hour," it used to say dramatically at the beginning of the action-packed "Stingray," a children's program. We might say the same about the next three months. War seems likely and, if it occurs, a lot of drama but drama without fun lies ahead.

Why does war seem likely? The reason is that the administration of U.S. President George W. Bush is determined to remove Iraqi leader Saddam Hussein from power and is gearing up for war, with the backing of U.K. Prime Minister Tony Blair.

Take these statements in recent days: Ari Fleischer, the White House spokesman, said Friday that "The fact that Iraq is in possession of undeclared chemical warheads, which the United Nations says are in excellent condition, is troubling and serious. Under the U.N. resolution, Saddam has an obligation to disarm. It has become increasingly clear that he is not doing so."

The previous day Fleischer had pointed out that Jan. 27, when U.N. inspectors are to issue a report about Iraqi compliance with U.N. demands, will be a key day.

In Britain, meanwhile, Blair on Thursday told the British Parliament that if the U.N. Security Council placed an "unreasonable veto" on war, "We would not rule out action."

Even without the U.N.'s sanction, Blair, and, it would seem, Bush is ready to attack. U.S. and British troops are being sent in large quantities to the Gulf. The desert will heat up as the year advances. February looks to us the time when the attack will come — unless Saddam steps down.

And what would an attack mean for the world economy? The impacts would be multiple around the globe. Blair, for example, faces huge political risks if the United Kingdom participates in an attack not sanctioned by the United Nations. Members of his Cabinet might resign. Members of Parliament might abandon the Labor Party. The political shock to the United Kingdom could be very great.

But it is the immediate economic consequences of war that we are most interested in, and the most important impact will be on the biggest economy of them all. The U.S. economy is struggling to gain momentum, even with the short-term interest rate at a 40-year low and with the government cutting taxes in order to pump money into the economy — and with a raging housing boom and cash from mortgage refinancing to help things along.

The normally reliable U.S. consumer faltered in the holiday season just past. Sales volumes dropped compared with a year earlier. In our view, familiar to regular readers, the fundamental reason is that the stock market bonanza of the late 1990s distorted the U.S. economy, fostering over-investment, which has partly corrected, and over-consumption, which has hardly begun to.

Even without a war the prospects for the U.S. economy are, in our view, grim. But, in these circumstances, the uncertainty of war, and the certainty of higher oil prices, seem set to prove decisive catalysts. Consumer confidence will fall further. Companies will continue to hesitate to invest. The house-price boom will stall. Even with the twin levers of economic policy, monetary and fiscal, pushed to full speed ahead, the U.S. ship is going to lose steam. Very low growth or renewed recession will be likely.

The U.S. stock market, already wobbly, will take these developments badly. If war breaks out in February it is hard to imagine that the Dow will not fall through the 8,000 level in the same month or in March and subsequent months may see the 7,000 level broken, as U.S. companies struggle with weaker consumption.

And renewed slowdown or outright recession in the U.S. economy, long the world's prime engine, will hurt the rest of the world. Further falls in the dollar will increase the impact of a weak United States on the rest of the world.

European and Asian exports to the United States will fall, harming growth prospects around the world. According to Simon Tilford, a London-based economist with particular expertise in Germany and the European economy, war "would compound already very weak consumer and business confidence" in Europe. "This would be most pronounced in Germany," Europe's biggest and the world's third largest, Tilford adds. He would foresee little or no growth in Germany in 2003, in the event of a Gulf War.

Japan, meanwhile, is already flirting with recession. According to Ryo Hino of J.P.Morgan, an investment bank, export demand is "the only hope" for Japan, the world's second biggest economy, "as domestic demand remains lackluster, with the balance of risks to the downside." But the yen is rising against the weakening dollar, adversely affecting Japanese export prospects. Hino also points out that other Asian countries "are generally more highly sensitive to changes in the global environment."

Another specialist in Asian economies, speaking anonymously, says "the key variable for Asia is U.S. import demand" and a war "would be a disaster for the whole of Asia." A deep fall in U.S. stocks would also be problematic for Asia as "markets in the region now matter, and they follow Wall Street," the same expert says. The political impact on Asia, too, could be serious, he says, "because of the fear of an Islamist reaction against the West, which, as shown by al Qaida activity in Singapore, Bali and elsewhere, would directly damage Asia."

Around the world the only countries to benefit from war would be oil exporters. Higher oil prices harm the United States, Europe and most of Asia, and, in Latin America, Brazil, a country which, with its need to refinance high debt payments in the capital markets, would be highly vulnerable to the financial fall out from falling U.S. stocks, slower world growth and heightened perception of risk.

"The situation is very tense and very dangerous," said U.N. chief weapons inspector Hans Blix Thursday. How right he was. The danger is not only for thousands of Iraqis who may lose their lives as the dictator who rules them is hunted, but also for citizens around the world. War may send an already fragile world economy into recession again this year.

Anything can happen in the next few months. Like "Stingray," it will be exciting, but it won't be fun.

(Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected])

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