War clouds fog US economic forecasts

  • Business
  • Tuesday, 04 Feb 2003

WASHINGTON: War jitters are clouding the US economic outlook, making it hard to discern the recovery’s underlying state of health and difficult to forecast what will happen when the current uncertainty lifts, economists say.  

“What happens this year is sort of anybody’s guess,” said Martin Baily of the Institute for International Economics.  

Like many economists, Baily, who served as a top economic adviser to former President Bill Clinton, believes concerns over the potential damage a war could wreak on the economy has already made businesses reluctant to hire and spend.  

But he also said the US recovery was being restrained by more than just concerns over a possible war with Iraq.  

“We had an excess of (business) investment, we had a way overvalued stock market and we are still working our way through those things,” he said.  

In the view of economists at Wall Street firm Goldman Sachs, war fears take a back seat to a hangover from the bursting of a stock market bubble.  

“It simply isn’t plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the United States is expected to prevail quite easily,” Goldman Sachs economist Jan Hatzius wrote in a note to clients.  

In a recent survey, the newsletter Blue Chip Economic Indicators found forecasters, on average, looking for economic growth of 2.8% this year, which would mark a slight pick-up from last year’s sluggish 2.4%.  

In general, economists see a weak first half of the year followed by accelerating growth once the war clouds pass. But there appears to be an unusually large range of forecasts, in part because of split views over what is holding the US economy back.  

In announcing its decision to hold interest rates steady at four-decade lows last week, policymakers at the Federal Reserve gave the war-fears argument a nod.  

“Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses,” the Fed said in its rate announcement, adding that the economy should improve “over time” as risks lift.  

Some analysts said the Fed’s phraseology of “reportedly” and “over time” suggested policymakers at the central bank saw the recovery saddled with more than just war.  

Nevertheless, the Fed reiterated its view that economic risks were balanced between weakness and a possible rise in inflation – a view some analysts see as disingenuous.  

“The economy clearly has a downside risk that exceeds any risk of inflation at this juncture,” former Fed governor Wayne Angell said. “They’ve misled the market a little on the side that the prospects for recovery may be brighter than they actually think they are.”  

However, some think the economy could show surprising strength if war-related economic risks fade.  

“The risks in the near-term are tilted to the downside and they are significant,” said Rick Egelton, deputy chief economist at BMO Financial Group. “Longer-term, if this (war) cloud is to rise, I think the risks by and large may be on the upside.”  

He added that extremely low interest rates, coupled with the prospect for stimulative tax cuts, suggested the economy could be growing solidly by year-end. – Reuters  

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