Global Policy Forum

By Paul Blustein

Worries are mounting among economists that a drawn-out war in Iraq could lead to recessions in the United States and overseas. "The economy is paralyzed. Businesses are reducing payrolls and investments, and consumers are very cautious," said Mark M. Zandi, chief economist at Economy.com Inc., a West Chester, Pa., research firm. "If the conflict wears on for three months, we'll be in full-blown recession." It would be a "debilitating" downturn, Zandi said, because of the weakness simultaneously besetting many of the world's other wealthy nations, including Japan, Germany, France and Italy. "We can't count on anyone to help us out," he said.

Not all economists take such a gloomy view, and financial markets around the world have retreated only part of the way from the powerful rallies that were triggered by early signs of a quick allied victory. The Dow Jones industrial average, which rose 997 points in the eight trading days ending last Friday, is down 320 points since indications of a tougher war began surfacing over the weekend; the Dow closed yesterday at 8201.45, down 28.43.

European share prices, which surged nearly 21 percent after the start of the coalition attack, are off about 5.2 percent so far this week, based on a Dow Jones index of major European stocks.

But some analysts fear that the dangers to the economy stemming from the war may be greater than investors seem to think -- a view the International Monetary Fund expressed yesterday in unusually blunt terms. "While markets may have priced in a short and decisive war," the IMF said in a report on global financial conditions, they "may have not yet focused on the possibility that uncertainty could persist for some time" about risks including "continued geopolitical instability and tangible threats of terrorism." Persistent uncertainty may "reinforce the headwind against global economic recovery," the report said.

In a like vein, the fund's managing director, Horst Koehler, cautioned in a German magazine interview published this week that "a global economic recession cannot be ruled out" if the war drags on. The logic behind such worries is relatively simple: The world's major economies have been sluggish for some months, and although that may be partly attributable to the lingering effects of the bursting of the stock market bubble, nervousness about the ramifications of the war is undoubtedly contributing to the low level of consumer confidence, a falloff in home sales, and reluctance among corporations to invest in plants and equipment.

So although a swift collapse of the Iraqi regime might have lifted the spirits of consumers and businesses substantially, a long war would mean that "they will stay hunkered down," which would "hit economies that are already vulnerable to recession," said Allen Sinai, chief global economist at Decision Economics Inc. He agreed with Zandi that the economy would slump "if the war goes on to midyear," as did Donald H. Straszheim, president of Straszheim Global Advisors Inc., who said, "If we're still bogged down three months from now, I would not be at all surprised to find us back into recession."

Some of the most dreadful threats to the global economy posed by the war have not materialized, in particular the prospect that President Saddam Hussein's troops would sabotage Iraq's vast oil fields or destroy petroleum facilities in Kuwait and Saudi Arabia. Crude oil prices have risen sharply in recent days, jumping more than 6 percent yesterday, to $30.37 a barrel on the New York Mercantile Exchange, but some analysts suggested that such movements were unlikely to be a major economic factor. "Articles highlighting rising oil prices and their correlation with a coming recession need at least partial retraction, in our view, now that the oil price, at its recent low, was just 4 percent greater than a year ago," Steven Wieting, an economist at Salomon Smith Barney Inc., said Wednesday in a newsletter to clients. "While the oil price may remain volatile, the fact that most of Iraq's oil-producing territory is now said to be in the hands of the coalition appears to be a positive."

Accordingly, some economists argue that a war lasting longer than initially expected won't matter much. "If we're on a trajectory where we can see that we're headed to a goal, and it's just going to take longer to get there, I don't think that's so damaging," said Gail Fosler, chief economist at the Conference Board in New York. "We now understand the parameters of the war. I think you'll see the economic environment improve, as businesses say there is not really a case for being quite so risk averse, because we kind of know the scope of the risks."

To some extent, the outcome depends on whether the economy has shed much of the excess capacity it accumulated during the stock-bubble years of the 1990s, and is thus poised for liftoff -- as Fosler believes -- or whether it is still burdened with that capacity, as Straszheim and others contend. "A quick war would help the economy just a little, because independent of the war, the economy is really struggling right now," Straszheim said. "But a bad or delayed outcome for the war is going to hurt the economy a lot." The war is still far too young for much evidence of its effect to have emerged. A top executive of Volkswagen AG, Peter Hartz, was quoted yesterday as saying that "we are seeing reticence on the part of customers" because of the war. But on Wednesday the firm's chief executive said he saw "no noticeable movements either upwards or downwards."

A survey by J.D. Power and Associates showed that new-car and light-truck sales fell 8 percent in the first four days of the war, compared with the corresponding period a week earlier, but some industry executives had feared a much steeper falloff because of the "CNN effect" -- people staying glued to their TV sets at home. Another auto executive, Carlos Ghosn, chief executive of Nissan Motor Co., said at a news conference in Paris yesterday that "when there is a situation with a major conflict and when it risks dragging on, it is not natural to be very positive on the evolution of the market in general."

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