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World: Experts See Few Signs For Postwar Economic Rebound

The views of economic experts who headed a recent panel at the Council on Foreign Relations in New York varied widely when it came to the war in Iraq. Some see the war causing recession, while others believe it may provide a small stimulant to the U.S. and global economies. One major factor, they say, is the time it will take to complete the war campaign. The price of reconstruction will also figure greatly.

New York, 8 April 2003 (RFE/RL) -- Some prominent Wall Street economists are expressing concern about the possibility of a global economic downturn caused by the war in Iraq, especially if it becomes a prolonged campaign.

The economists participated in a panel discussion on 4 April at the Council on Foreign Relations, a New York-based policy center. They offered differing views on how they believe postwar economic developments will play out, but all were cautious, citing worrying factors that pre-date the war.

Ethan Harris, who is the chief U.S. economist at Lehman Brothers, a financial-services company, said the impact of the war can already be anticipated in some areas. "The impact of this war is fairly easy to quantify in some regards and very hard in other regards. The easier-to-quantify stuff is the impact on budgets. We know we are going to get big budget deficits out of this. We know that we are going to have a big peacekeeping cost in any reasonable scenario. We also know pretty well how oil prices will affect the economy -- a $10 increase [per barrel] in oil prices, which is our estimate of the war shock -- strikes about half a percent from growth," Harris said.

Other panelists said the heavy dependence of the stock market on war-related news -- if headlines on a particular day look optimistic, markets go up, and vice versa -- makes it hard to do any long-term economic predictions. Harris said this trend will likely continue for a while.

"The hardest stuff to measure is the psychological stuff and that, in fact, is what will distinguish a good from a bad forecast in terms of the outlook. In our view, [the war] is a major shock to the [U.S.] economy. We think that we will get only 1 percent growth in the first half of this year coming from a trend of growth of about 3 percent -- that's not a very favorable outcome. And as long as the war goes on, we are going to get recession-like readings for the U.S. economy," Harris said.

But Harris also said he thinks there will be some real recovery coming out of the war, in contrast to the repeated false recoveries in the U.S. economy in the last two years. He attributes this to the expectation that the U.S. dollar will weaken through the end of the year.

William Dudley is managing director and chief U.S. economist at Goldman, Sachs, and Company, a financial-services firm. He said the war's effect on the U.S. economy is not the fundamental reason why it is weak. He said the war is a factor, but not the dominating factor.

"What's really driving the economy is that we're in the midst of very large balance-sheet adjustments caused by the bursting of the stock market bubble [in March 2000], which are causing corporations to be reluctant to invest, causing households to try to save a greater portion of their income -- because obviously their financial asset returns have been very disappointing -- and causing state and local governments to have to raise taxes and cut spending. On top of that, you have trade drag because the economy is actually doing better than Europe and Japan, and the dollar is still overvalued, so it's very, very hard for the U.S. economy to develop much momentum," Dudley said.

With each of these "soft patches," Dudley said, the corporate sector is becoming more cynical, wondering whether there will ever be strong economic growth. One of the problems, he said, is that financial regulators are often slow to react to trends.

"Deficits can go up, but they can go up passively, as opposed to actively, where we actually cut taxes and try to stimulate the economy. I think that you need the U.S. to be less the engine of growth in the world, and for that to happen you need a weaker dollar that puts pressure on other countries to follow more stimulative economic policies. The problem, though, is everyone is acting in a reactive mode rather than an anticipatory mode. So by the time you get the ECB [European Central Bank] to ease monetary policy, it's sort of after you've had a bad economic outturn. It doesn't turn to be very effective in that circumstance," Dudley said.

According to Dudley, the grim outlook will change a bit once a proposed tax-cut package is passed by the U.S. Congress. Dudley, as opposed to Harris, is convinced that even after the war in Iraq, the global economy will continue to be in a state of prolonged weakness.

Stephen Roach, another participant in the panel, is a chief economist and director of global economics at Morgan Stanley, a financial-services company. One concern he stressed is the overwhelming U.S. influence on the world economy.

Since 1995, he said, the United States has accounted for 64 percent of the cumulative growth in world GDP at market exchange rates. Roach described this situation as "bizarre," "ridiculous," and "unsustainable."

"I characterize the world as a very dysfunctional place right now. The U.S. is the best of the lot, but we are going down a very reckless path in the standpoint of managing a savings-short economy and being increasingly dependent on the rest of the world to fund our excess consumption. Because of the world's dependence on the U.S. -- it's global in scope. Clearly, one leg the world had to [stand on to] keep 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. So I think world GDP growth will be negative in the current [second] quarter," Roach said.

Roach said the current U.S. administration's tax cuts and postwar rebuilding plans will result in an enormous budget deficit, with worldwide implications.

It was noted by all participants in the panel that the markets haven't priced in anything that goes beyond the anticipated short-term military operation in Iraq. They also said they do not expect significant results from this week's meeting of the Group of Seven finance ministers to offset some of the near-term adverse economic effects.