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globalinsight.com
Iraq War Scenarios
by International Group Staff
A U.S.-led war against Iraq now has such high likelihood that it has been incorporated into the Global Insight's latest interim forecasts. The most likely scenario, which has been assigned a probability of more than 60%, would be a short and successful war that starts before the end of March and comes to an end within two months. The anticipation of war depresses economic activity during the current quarter, but the uncertainty about an attack on Iraq is likely to prove worse than the impact of the war itself. Once the fighting starts, the expectation of a quick victory should prove bullish for the global economy, leading to a higher growth rate for the year than in any scenario in which the current crisis drags on without a satisfactory solution. Global Insight's latest bottom-up baseline forecast of the global economy, which assumes a quick and successful Iraq war, projects an annual real GDP growth rate of 2.8% for 2003, compared with 1.2% in 2001 and 1.8% in 2002. This baseline forecast rests on the following assumptions:
A U.S.-led military campaign against Iraq starts before the end of March and is concluded with resounding success within two months, with fewer than 1,000 casualties on the coalition side and without any heavy damage to Iraq's non-military facilities.
Deliberate targeting of Saddam Hussein's command and control capabilities and the rapid collapse of his regime prevent Saddam from any effective use of his weapons of mass destruction or extensive sabotage of Iraq's oil fields.
Despite pro-Saddam demonstrations in some Arab countries, most neighboring countries support the coalition effort to overthrow him.
Oil-exporting countries quickly fill any gap created by temporary disruptions of Iraq's oil production.
Oil prices initially spike above $40 per barrel at the start of military operations, but retreat as it becomes evident that the hostilities are not going to cut off supplies. Regional uncertainties, along with the lingering shortages caused by the Venezuelan oil strike, result in an average price of $31.5/barrel during the first quarter of 2003, but prices drop to the low $20s for the remainder of the year; the annual average is $25.3/barrel.
The dollar continues its gradual decline, losing about 4% of its value against other industrial country currencies over the course of 2003.
Economic activity in the United States is hampered by a plunge in consumer and business sentiment as the war begins, but is lifted thereafter by the war's successful conclusion, tax cuts, and extra government spending.
The war adds $50 billion to U.S. federal government purchases over the next six quarters.
Global Insight believes that the ouster of the Iraqi dictator will be achieved relatively cleanly, given his lack of popularity and his diplomatic isolation. His overthrow will be a plus for the region, as well as the rest of the world: it will allow the lifting of UN sanctions against Iraq, and allow the United States and the international community to shift their attention to defusing the Arab-Israeli conflict and the Korean nuclear crisis. These developments, in turn, should reduce some of the geopolitical uncertainties that have been depressing consumer and business confidence over the past two years.
As a result, our baseline forecast projects global economic growth to accelerate sharply after the first half of this year. We expect growth to average 2.3% year on year in the first two quarters of 2003, surge to 3.0% by the fourth quarter, and peak at 3.7% in the second quarter of next year.
Four Alternative Scenarios in Brief
Global Insight has also developed four alternative scenarios for the world economy, covering a broad range of possible outcomes in the Iraqi crisis.
Victory Without War or Almost No War. Assigned a 20% probability, this is an optimistic scenario that implies either a regime change in Iraq without any external military intervention or a war of extremely short duration (less than one week) with minimal adverse effects on consumer sentiment and business confidence.
No Change. This scenario assumes a continuation of the status quo, with uncertainty over Iraq continuing through the next few years as the United States and its allies fail to agree on the use of force. Iraq sows further discord among them by making half-hearted concessions and promises. This scenario is assigned a probability of less than 10%.
Long War.In this scenario, the Iraqi army puts up heavier resistance than anticipated in the baseline case, resulting in several thousand coalition casualties. Furthermore, the overthrow of Saddam does not end the fighting, as some military units and armed civilians continue to resist through early next year, employing sporadic hit-and-run, guerrilla tactics. This scenario is assigned a probability of less than 10%.
Bad War. The war against Iraq begins sometime during the first quarter, but Iraqi resistance is greater than anticipated, with hostilities escalating into a regional conflict. The U.S. economy experiences another recession and global economic growth slows markedly. This scenario is highly unlikely, though, and has been assigned a probability of less than 2%. |
