Protracted war set to inflict further damage on faltering economy

WAR in Iraq has already started denting the global economy, data and reports showed yesterday, stoking fears of even greater damage ahead as the chances of a protracted war seemed to be rising.

The International Monetary Fund warned a long war could undermine the global recovery and disappoint markets which had generally bet on a fast outcome. Even a short war might have longer-lasting economic fallout, it said.

European Central Bank Governing Council member Ernst Welteke said a long war would more likely lead to protracted global economic weakness than to a quick recovery.

“A long-lasting Iraq war would darken the economic perspectives for the world economy,” Mr Welteke said. Fellow board member Eugenio Domingo Solans said ECB interest rate policy would hinge on developments in the war.

Meanwhile, morale among businesses in France sagged due to uncertainty over the US-led war, with industry growing increasingly worried about the economic outlook for the second-largest economy in the eurozone.

“Clearly the uncertainty has hit companies’ and probably consumers’ confidence and the second-half recovery that we and others were forecasting is looking increasingly precarious,” said Jonathan Hoffman, an economist at RBS Financial Markets.

Elsewhere, Danish unemployment hit a three-and-a-half-year high with employers reluctant to create jobs on account of the war, and a key Dutch think-tank warned a prolonged conflict could cause its gross domestic product (GDP) to shrink.

“The expectations get more unfavourable if the war and international tensions continue longer,” the Dutch Central Planning Bureau said.

US President George W Bush said on Wednesday fighting was “far from over”, changing a speech at the last minute to erase an assessment that the campaign was “ahead of schedule”.

And US military officials were quoted in the Washington Post newspaper as saying the conflict could last for months.

Such signs the war might take more than just the few days or weeks that optimists had once predicted led markets to brace for more havoc to come.

Oil jumped more than a dollar a barrel, shares sank and safe-haven bond prices rose.

IMF director Gerd Haeusler, delivering a Fund report on economic risks, said the economic damage could be long-lasting even if the war was short.

“What will it mean for the region, whether or not the likelihood of terrorist attacks might diminish or, some say, even increase... are issues which are far more important than the question of whether the war may take a week longer or not,” he said.

Spreading terrorism could undermine the fragile global recovery and a steep fall in the dollar could also destabilise markets already struggling to recover from the bursting of the asset price bubble, the Fund report said. The dollar sagged in the weeks leading up to the war, but recovered as soon as fighting started.

Stocks veered up at the same time, and oil prices, which had been well over $30 came down to around $25.

But these trends have now started reversing.