With war's end, economic uptick - but no surge
WASHINGTON — Peace is good, but not good enough to jolt the world economy out of its current lackluster performance. That's what experts say about the global economic impact of American combat operations ending in Iraq. President Bush said earlier this week that victory in Iraq was "certain" and the Pentagon has begun to halt troop deployments to the war zone.
Still, "nobody is optimistic," about the war's end triggering a rapid recovery in the world economy, says Frank Vargo, vice president of international economic affairs at the National Association of Manufacturers, a trade group here.
Growth will be "average or med-iocre," adds Davis Wyss, chief economist at Standard & Poor's, the investment data and analysis firm.
The reason: The benefit of stabilized oil prices and bolstered confidence is offset by deeper problems, from corporate debt loads to the burden of higher security costs.
At the same time, the end of the war confronts the US and its major economic partners with an important challenge. A decades-long trend of globalization and expanded trade, some worry, could be dampened by the politics surrounding the war. "Can we overcome the rancor from the pre-war diplomacy in order to make progress on trade and monetary issues?" asks Robert Hormats, vice chairman of Goldman Sachs International, an influential global investment-banking concern. "The jury is out."
One hopeful sign of global cooperation came Tuesday, when French President Jacques Chirac called President Bush. It was the first time the two had spoken in more than two months, since disputes over policy toward Iraq frayed their relationship.
War's end may well produce results even more surprising than a thaw in relations between Presidents Bush and Chirac. Wars - at least those lasting longer than a month - have produced profound, sometimes unexpected, longer-term effects. For example, the Revolutionary War was followed by a depression, the Civil war by falling prices or deflation, and World War I and the Vietnam War by inflation.
"In the recent period, there has been a tendency for the world economy to do badly during wars and recover afterwards," says Mr. Wyss, Standard & Poor's economist. But there is no reliable pattern for postwar economic performance. 'Sometimes it has been good and sometimes it has been bad."
Why care about the global economic outlook? On a humanitarian level, strong growth helps improve standards of living for the world's poor. On a more self-interested level, a healthy global economy benefits Americans by providing a market for US goods and bolstering the means for those overseas to invest in the US.
"The question of the hour is whether present sputtering global growth will suddenly lunge ahead into a strong immediate recovery," Kenneth Rogoff, director of research for the International Monetary Fund (IMF), told a press conference last week. "Perhaps. But our baseline [forecast] here is for subnormal growth of 3.2 percent." Late last year, the IMF was more bullish, predicting 3.7 percent growth for the world economy.
The two biggest economic pluses from the war's end are falling oil prices and an end to war-related uncertainty. "It is helpful that oil prices will fall," says David Ingram, director of international economics at the consulting firm Economy.com. "They have the same effect on the economy as taxes."
Oil prices peaked in March at $37.82 for a barrel of Brent crude. On Wednesday, oil for May delivery was trading at $29.18 in New York. Oil for June delivery was trading in London at $25.22. According to estimates by investment firm Lehman Brothers, each $10 drop in oil prices adds about half a percentage point to world economic growth for the year.
The other positive impact from the end of war is the "indirect and fuzzy" effect of a reduction in "the sense of risk in the global economy on household and business sentiment," Mr. Ingram says.
But analysts caution that whatever bounce the world economy will get from a reduction in oil prices and a rising certainty is offset by a number of negative factors. That's why most experts side with the IMF in expecting the end of the war to produce, at most, a mild uptick for the world economy, rather than a boom.
Perhaps the biggest factor holding down global growth is the tepid pace of economic activity in the United States, which accounts for one-fifth of global economic output. The IMF is predicting that economic growth in the US will be just 2.2 percent in 2003 before rebounding in 2004.
One sign of the current doldrums in the US economy: Earlier this week, the Federal Reserve reported that the portion of US factories in use fell, in March, to its lowest level in 20 years. Other factors holding down global economic growth include "lingering problems from the bursting of the equity price bubble, especially in Europe," says Mr. Rogoff, the IMF economist. "Weak corporate balance sheets still weigh on investment."
As a result of these and other factors, growth in the area where the currency is the euro - which accounts for roughly one-sixth of world economic output - is expected to grow at a weak 1.1 percent in 2003, while Japan is projected to grow at 0.8 percent. Prospects are strongest among the emerging economies of Asia where the IMF predicts growth of 6.0 percent. But the outlook for growth in Asia is clouded by the impact of - and fear about - severe acute respiratory syndrome (SARS).
"One hears of a fair amount of commercial traffic being canceled and a fair amount of interruption of commercial flows," says Mr. Vargo, the economist of the National Association of Manufacturers.
The global economy is still adjusting to the effects of the Sept. 11 attacks, effectively unwinding at least a portion of the so-called economic "peace dividend" that came at the end of the cold war. Signs of this unwinding include higher insurance costs, a reduced pace of global economic integration, and weaker consumer confidence. "We are already in the middle of a military buildup," notes Goldman Sachs vice chair Mr. Hormats. "Add to that homeland defense costs - government and nongovernment - and it does unwind the peace dividend."