BIG PICTURE: Iraqi War - A Hole In Most Forecasts
16 Dec 15:44
By John McAuley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Economists are challenged by an immense uncertainty
right now.
Official expectations among economic forecasters tend to be that there will
be a war between the U.S. and Iraq, that it will take place in the first
quarter of 2003, and that it will be brief and will turn out favorably for the
U.S. and its war aims.
However, very often it seems that the assumptions about the war are merely
obligatory recognitions that the threat of a war is serious and holds potential
risks for the economy.
These we could include a plunge in consumer confidence - or, more
importantly, a plunge in consumer spending - if the conflict were to be
prolonged and bloody. Such an unfavorable outcome could also put both the
foreign exchange value of the dollar and international oil prices in
considerable jeopardy. And it would likely perpetuate the current business
pessimism that is preventing the U.S. economy from returning to the stronger
growth trend of the 1990s.
Such risks are seldom explored in any detail and the conclusions that
economists draw in their research read more like wishful hoping than considered
analyses.
It's as if the economists want to skip over the geopolitical uncertainties
and get back to the more familiar problem of simply figuring out what the
economic indicators are signaling on the prospects for the overall economy.
The conventional analysis has several aspects in common that are useful to
recognize.
-A war is most likely to occur in the first quarter, after the holidays in
the U.S. and Ramadan in Iraq (Ramadan ended on Dec. 5) and before temperatures
in Iraq become too intense.
-The war is expected to be more of an air war and much less of a ground
offensive than Desert Storm in 1991. Many forecasters who hazard any discussion
at all are much more convinced that so-called "smart weapons" will feature
prominently and allow the war to be fought on an even higher technological
plane than 12 years ago, reflecting new innovations.
-Most believe that resistance is likely to prove brief and ultimately
ineffective. As a result, many forecasts assume that the war will be over
quickly and attention can turn back to conventional economic uncertainties.
By taking that perspective, many economists have rationalized that the
outlook is positive.
"Our most likely war scenario is one in which most of the negatives - the oil
premium and the negative stock market reaction - has already happened," said
Nariman Behravish, chief economist of the consulting firm, Global Insight.
Indeed, Behravish and his colleagues believe there is a potential for an
economic lift from the reduction in uncertainty once the war has been fought
and won. However, their official view makes allowances for a range of
possibilities, weighting them from more favorable (15% probability) to less
favorable (30% risk).
One of the challenges for economists is that assessing the outcome of the
conflict requires expertise beyond their usual purview. In fact, some of have
sought to incorporate the insights of geopolitical risk experts into their
economic analyses.
Allen Sinai, chief economist and president of Decision Economics, called on
the expertise of Ian Bremmer, president of the Eurasia Group, to provide the
geopolitical substance to Decision Economics' 2003 forecast.
Speaking alongside Sinai at the firm's year-ahead outlook presentation,
Bremmer said he believes "there is an 85% probability that there will be a war
with Iraq by the end of the first quarter, that it will be successful and that
it will last four to six weeks."
With that in mind, Sinai is calling for only a 2.3% rate of growth in gross
domestic product during 2003, albeit with a faster pace by the fourth quarter.
But most economists have little more than historical precedence to guide them
in their predictions of the timing, duration and outcome of any potential war.
Global Insight Group Managing Director Andrew Hodge, for one, says that "the
behavior after (the) Sept. 11 (terrorist attacks) and after the 1990-91 buildup
and war provide a guide."
Certainly, a quick and relatively smooth resolution to the conflict is
generally seen as a potential catalyst for growth in the U.S. economy, given
that uncertainty about it is believed to have already been a factor in the
conservative stance adopted by U.S. businesses this year.
"If it goes well, it's one of several factors that gets the economy started
growing again," said Lehman Brothers chief economist Ethan Harris. However,
Harris does not see a successful conclusion to a war as sufficient by itself to
spark a return to a more trend-like growth path that the economy has been
lacking for the past two years.
And while he is generally predicting "a favorable outcome to a war fought in
the first quarter," Harris is retaining uncertainties that make his economic
forecast contingent on the outcome of the war.
If the war drags on, he says, there are associated bad outcomes, such as
damage to the oil fields, that could make an already dreary economic situation
worse.
-By John McAuley, Dow Jones Newswire, 201-938-4425; john.mcauley@dowjones.com
(END) Dow Jones Newswires
12-16-02 1544ET |
