Iraq war would curtail Asia's growth prospects

Iraq war would curtail Asia's growth prospects

Agence France Presse, Singapore

A long war in Iraq would hurt Asia's economic prospects this year, particularly for the export-oriented countries which depend on the United States to drive growth, economists said on Monday.

Even the sizzling performance of China, the region's economic star, will not be a sufficient buffer should the U.S. economy -- the locomotive of global growth -- suffers from a prolonged military campaign to oust Saddam Hussein, they said.

"The Chinese growth engine can pull some of the regional economies for a while but even that may be dragged down if global growth slows down," said Song Seng Wun, a regional economist at G.K. Goh brokerage.

"Asia is still dependent on the U.S. consumers for growth... if the war isn't going as well as what (President George W.) Bush and his team suggest, then I suppose we have to be worried as the U.S. household sector may not be able to hold up the U.S. economy," Song said.

"That of course will be (a) problem for us," he said.

The U.S.-led campaign suffered its biggest blow when film of dead and captured American soldiers were shown by Iraq, which claimed 25 U.S. and British troops were killed in fighting around the southern city of Nasiriyah on Sunday.

Asian governments have in recent years taken measures to boost domestic demand in a bid to curb their countries' reliance on exports to the United States.

South Korea and Thailand have made notable progress in promoting domestic demand but both, along with their neighbors, still remain significantly dependent on the U.S. economy, two- thirds of which depends on consumer spending.

"If we were to see any risk to those exports, then of course we will have problems as domestic demand is far too small for the governments to effectively do anything much," said Song.

"Countries like Thailand can still hold things up for a while but they will still feel the heat," he said.

Regional economies would likely see gross domestic product growth cut by as much as two percentage points if the U.S.-led war lasted three months or more but a recession was ruled out for now.

"It may subtract one to two percentage points from those Asian growth numbers... we would not develop the full momentum that would be expected in the second-half," said David Cohen, an economist at MMS International.

"If the war is prolonged, oil prices will rise... higher oil prices will hurt the domestic economies as well," said Cohen.

Some of the region's more open economies such as Singapore and Taiwan will be severely affected, he said.

"Trade and tourist dependent economies like Singapore will suffer," said Cohen.

"Remember we are still recovering from the 2001 downturn in Singapore. That would be a disappointment for Singapore, Taiwan and others as well," he said.

The Economist Group warned in its recent outlook forum held in Singapore that half of Asia including South Korea, Thailand, Taiwan and Singapore could slip into recession and be saddled with high inflation in the worst case of a "messy" Iraq war.

Oil prices could hit between US$80 and $100 a barrel as countries hoard the commodity to build up reserves, it said.

Every 10 percent rise in the average oil price from last year's average of $26.20 a barrel would cut Asia's economic growth by 0.23 percentage points, with inflation rising by 1.1 percentage points, it added.

Asian equities rallied when the United States and its allies began military action against Iraq last week, ending months of uncertainty about its timing.

Now that Iraqi troops are putting up stiffer resistance than expected, hopes of a swift U.S.-led victory will have to be toned down, economists said.

"Initially the expectation was that it would be over and done with and the markets have rallied on that expectation," said Song from G.K. Goh.

"Now I suppose a few days into the attack, there may be a little bit more adjustment of expectations," he said.