January 30, 2003	Thursday	Ziqa’ad 26,1423

NEW YORK/WASHINGTON: When the bombs started dropping in Baghdad in 1991, the sense of relief on Wall Street that the waiting was over was palpable. The next day, the Dow Jones index of leading shares climbed 5 per cent.

As President Bush on Tuesday was preparing to tackle the two biggest issues of his administration in his state of the union address — Iraq and the economy — the two have once again become hopelessly intertwined. Both Wall Street and Washington view the address as one of the most important in the president’s career.

The message to the markets is that they do not have to wait long. The nation is prepared for war and the uncertainty of the past year will not be prolonged much further.

The US economy is in a state of recovery interrupts. The dollar has fallen by more than 8 per cent against the euro since the start of the year, Wall Street is sliding again after a fleeting rally, and corporate America has delivered a disappointing set of results in the past two weeks.

The common refrain from big names in US business was that a pick-up in the economy during 2003 was now less assured because of the uncertain outcome of the potentially bloody chess game being played in the Middle East.

Oil prices were spiking again on Tuesday when the Iraqi Deputy Prime Minister Tariq Aziz said that Baghdad could strike at Kuwait if the US invades.

The stalemate, punctured with bellicose rhetoric from both sides, is weighing heavily on stock markets, the dollar and consumer confidence, all of which dislike nothing more than uncertainty. Gold, a haven for investors in unpredictable times, is at a six-year high.

The hope among economists is that if a war is to be fought, that it will happen soon and have a decisive outcome.

The president is eager to avoid the mistakes of his father, who won plaudits for his action in the Middle East but failed in his bid for re-election because of domestic concerns.

In the fight against sliding approval ratings, Mr Bush has detailed a series of economic measures to reassure voters. The centrepiece of his plan is the $674 billion stimulus package outlined at the end of last year, with its main plank a much-criticised cut in the tax on dividends paid to shareholders.

The removal of the treasury secretary, Paul O’Neill, was part expediency and part public relations exercise. Mr O’Neill was no fan of tax cuts and was not considered the right candidate to sell President Bush’s stimulus package to Congress.

But the changes in the Bush economic team also sent a message to the public — that the administration believed it must do better. Mr O’Neill’s replacement, Mr John Snow, was sworn on Tuesday and made supportive comments on key policies, such as the need for the tax cuts.

What President Bush is unable to make much capital of is the fact that the US economy is still growing at a faster rate than almost any other developed nation — it is expected to expand by 2.7 per cent this year. Perception and sentiment are the more important factors at work.

“It is politics, not economics, that is moving the market at the moment,” said Steve Barrow, a strategist at the stockbrokers Bear Stearns.

Corporate reform in the wake of last year’s financial scandals and high-profile parading of white-collar criminals in handcuffs before TV cameras have also been designed to restore faith in the markets, but the administration is still on the back foot.

When President Bush denounced the ‘axis of evil’ last January, he was still phenomenally popular, with some 84 per cent of the population stating that they thought he was doing a good job and 64 per cent that he was handling the economy well.

Twelve months later, the ‘war on terrorism’ is still under way and the president’s rating may still be benefiting from the rallying effect of patriotism, but nevertheless he looks mediocre and vulnerable in the polls. His general job approval rating is only 60 per cent, according to a new Gallup poll, and only 46 per cent think he knows what to do about the economy.

Figures published showed consumer confidence dipping to nine-year lows. “It’s fear about war and the impact on the economy,” Kevin Logan, a senior economist at the investment bank Dresdner Kleinwort Wasserstein, said. “People are concerned about the price of oil and they’re worried about what it will do to the economy.”

More worryingly for the administration, most Americans do not think that single-minded reliance on tax cuts is the way out of the downturn. Yet that is the prescription President Bush was expected to stick to in his speech.

SPENDING POWER: The willingness of American consumers to keep spending even after September 11 and last year’s downturn has kept the economy moving. Consumer spending accounts for two-thirds of gross domestic product. If confidence is sapped and the tills stop ringing it could have devastating effects, not only for the US, but also for the rest of the world. American retailers have just suffered their worst Christmas in three decades.

The clear splits in the United Nations security council represent a grave cause for concern for the markets as much as for ordinary Americans. Going it alone (or with only Britain and Australia) would raise the risks and costs of the war to the US economy. It would also mean that the US would shoulder most of the costs of a subsequent military occupation, which is tentatively expected to last 18 months but which could drag on much longer.

Moreover, the US will be under intense international pressure not to try to cover the costs of the occupation with Iraqi oil revenues. That, the state department and the justice department are arguing, would be of questionable legality and would vindicate critics of the US from around the world, who argue that Washington is only interested in Iraq’s oil deposits.

The White House game plan envisages a post-war boost in Iraqi oil production with the lifting of sanctions and the renewal of investment in its ageing drilling and refining infrastructure, lowering world oil prices and providing an injection of adrenaline for the US economy in time for the 2004 presidential election.

Those calculations could be thrown if Saddam Hussein opts to sabotage Iraqi oil fields in the same way he did to Kuwait’s, setting fire to wells and blowing up well heads.

Although the year is still young, some economists are murmuring that stock markets could fall for a fourth year in a row. In a nation where around 84 million people have a direct investment in the stock market, that is no platform for an election campaign.—Dawn/The Guardian News Service.