NEW YORK, April 5: Anything less than a short, decisive victory for US-led forces in Iraq would paint a gloomy picture for the global economy, top investment bank economists said on Friday.
Looking for a repeat of the short 1991 Gulf War, investors have bet on a quick US victory. Since the day before bombs started dropping on March 20, the S&P 500 has risen more than 5 per cent.
The swift US and British troop march to Baghdad, casualties notwithstanding, has also lopped off the “war premium” in global oil prices, knocking about $9 off the price of a barrel of oil to around $28 per barrel.
Even so, economic growth is expected to be slow.
As long as the war goes on we are going to get recession-like readings for the US economy, said Lehman Brothers chief economist Ethan Harris at the Council on Foreign Relations on Friday.
A very long war, I think we get a recession in the United States, Harris added.
When asked what it would take for him to project economic growth recovering back to 3 per cent, Stephen Roach, chief economist at Morgan Stanley joked, What would it take? Probably a lobotomy.
Lehman has projected 1 per cent growth in gross domestic product for the first half of this year. We know we are going to get big budgets deficits out of this war and there are going to be peacekeeping costs, he said.
The US Congress decided on Friday to allocate $80 billion to continue the war in Iraq, even more than President George W. Bush is seeking for these purposes.
Any extension of the war into other countries such as Syria, Iran or North Korea would be constitute a market shock, Roach added.
The United States has been warning Syria and Iran to stay out of the conflict in Iraq, while on Thursday the UN envoy to Pyongyang said North Korea’s nuclear standoff with the United States has the potential to develop into war.
The markets are not pricing in anything beyond what they perceive to be a relatively prompt end to the immediate hostilities in Iraq, said Morgan Stanley’s Roach.
What’s more, the spread of the deadly respiratory SARS virus from China and Hong Kong, killing 82 people, has already hurt northeast and southeast Asia, the regions economists thought would absorb excess US inventory .
The one leg the world had to keep the global growth rate in positive territory was Asia, and Asia has just gotten a huge punch right in the midsection with this SARS related disease, said Roach.
Service sector activity, whether it’s travel, financial services, even retail has come to a virtual standstill in most key ASEAN countries and it’s also having an impact on China, he added.—Reuters