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French Version

Business Chronicle: Will war mean an economic recovery for the US?

The outlook for the world economy in 2003 will depend, as ever, on the performance of the US, which accounts for a full one-third of the global Gross Domestic Product.

After enduring a stop-go recovery last year, the US, forecasters believe, should enjoy stronger economic growth in 2003.
However, this doesn’t seem to be the case. The dollar had been slipping since early last year, weakened by disappointing economic reports, a falling stock market and wary foreign investors.

Lately a new round of pessimism is ruling as war with Iraq appears more imminent. Consumers are less confident about the economy. Business executives won’t invest in their companies’ futures, and wary investors are sending stock prices tumbling. So, the threats of war with Iraq, rising oil prices and other geopolitical uncertainties have been dragging it lower. Another factor weighing on the dollar is the gap between the US and euro zone, long and short-term interest rates which favor the euro. None of these factors will change much in the short term.

The US needs to attract money but will the country be able to do that in times of heightened risk? Apart from these worries, there is also the question of the level of US external indebtedness and the mounting US current account deficit. This is seen as unsustainable, requiring a significant fall in the overall value of the dollar if the problem is to be contained.

But, if the US gets involved in a war, housing prices may fall. Although every war—and its economic backdrop—is different, wars often depress housing prices because they hurt consumer confidence, especially when they occur during periods of economic distress.

During the Gulf War in 1991, sales of new homes fell by 4.7 percent, and new home prices, adjusted for inflation, dropped by 5.8 percent.

However, the forecasts view that the dollar will stage a modest recovery in the course of 2003. Also it assumes that any war with Iraq may be short and would have a positive effect on US equities and on the dollar.

But until the tensions with Iraq are resolved, the US economy has very little maneuvering room between expansion and recession, and it cannot afford many missteps.

Khair Mikkawi is a financial consultant based in Riyadh. He contributed this article to The Star.

Amman,03 11 2003
Khair Mikkawi
The Star
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