Risk of war threatens to spark new global slump
Risk of war threatens to spark new global slump
Agence France-Presse, Paris
The global economy, stumbling already over financial scandals and stock market routs, is at risk of tumbling into recession if the United States launches military strikes against Iraq and a new oil price shock ensues, analysts warned Monday.
"The Iraq wildcard and the related possibility of an oil shock -- however brief -- shouldn't be taken lightly," warned Morgan Stanley chief economist Stephen Roach.
Global economic growth, which started signs of recovery in the first half of the year following the U.S.' lead, could remain sluggish at a rate which would not provide "the cyclical cushion that normally shields economies from the pressures of all too frequent shocks", Roach explained.
The financial scandales that engulfed Enron and WorldCom have deeply shaken investor confidence, and in turn, companies.
Although consumers, especially those in the United States, keep spending, companies have been far less indulgent with their investments, drastically reining in capital expenditure.
With the world economy already in a shaky condition, the shock of war in Iraq and a sharp spike in oil prices could tip the leading economies into recession, aborting the recovery eagerly awaited at the beginning of the year.
CDC Ixis Capital Markets economist Florence Beranger noted: "Risks are beginning to mount given the the geopolitical context and possible rise in oil prices".
Morgan Stanley's Roach pointed to the example of the U.S. recession that followed the 1991 outbreak of the Gulf War. At the time, the U.S. economy, sapped by a jump in oil prices in the wake of the Desert Storm operation, limped into recession.
But now the risks of war could weigh even more heavily on the world economy.
"Today's global economy is more trade intensive and more U.S.- centric," Roach said, warning: "Should America suffer a recessionary relapse, the rest of the world is lacking the cyclical immunities that would prevent renewed global recession."
Credit Lyonnais chief economist Jean-Paul Betbeze explained that the duration of a conflict with Iraq would be pivotal in diagnosing a world economic malaise.
Betbeze reckoned "a swift and tidy resolution of the Iraqi question" would be the lesser evil for the global economy.
Meanwhile, the prospect of war hangs heavily in the financial markets.
Bank of America economist for Europe Lorenzo Codongo noted: "It's already war in financial markets".
Investors are already taking into account the potential impact of U.S. military strikes against Iraq. Oil prices are flirting with 30 dollars per barrel on concerns over supply shortages while stock markets slump as cautious investors put their money into assets perceived as safer.
The price of gold, seen as a safe-haven by investors, climbed to a two-month high on Monday of US$322.20 per ounce on the London bullion market.
However, Codongo offered a note of consolation for jittery investors. "While the US prepares for war against Iraq, financial markets do not appear to price in a prolonged conflict".