WASHINGTON: Concern about the economic effects of a possible war with Iraq has led a top-notch panel of forecasters to trim its outlook for US growth during 2003.
In the February issue of Blue Chip Economic Indicators, a closely-watched newsletter, analysts projected the US economy would expand 2.7% this year.
The latest forecast is a scale-back from January’s prediction of a 2.8% growth rate and marks the first time since November the projection has been reduced.
In a summary of the economists’ views, Blue Chip said the reduction in the forecast “reflects increased fears about the inevitability of a US-Iraqi conflict and its attendant risks to the outlook.”
And despite a guarded view of the US economy’s performance, an overwhelming majority of analysts on the panel are leaning towards the belief that the Federal Reserve will be raising rates rather than lowering them this year.
Asked if the Fed would raise rates in 2003, 84% of the Blue Chip respondents replied “yes.”
The newsletter said both the financial markets and the economy would get a quick lift if a war with Iraq proved short-lived and yielded a swift victory for the US.
“But given the likely need for a large occupational force after ousting the current Iraqi government, the costs and uncertainties of a prolonged US presence in Iraq might continue to dog the US economy, particularly if America and Britain go it alone,” the report added.
Blue Chip said other factors, such as weakness in the stock market and uncertainty about consumer spending amid a weak job market, were also contributing to wariness about the pace of economic growth.
When President George W. Bush warned last Friday “the game is over” for Iraqi President Saddam Hussein, stock prices fell to four-month lows. War worries and a government alert about a possible terrorist threat were at play in the past week’s slide in US equities prices.
The Blue Chip panel forecast a US economic growth rate of 2.6% in the first three months of this year, with a pickup to 3.2% in the second quarter. It pegged growth in the third quarter at 3.7% and an expansion rate of 3.8% in the fourth quarter. The forecasts were compiled prior to the release of last Friday’s employment report, which showed a surprisingly strong gain of 143,000 in US payrolls.
The number inspired some hopes in financial markets that the economic recovery might be perking up, but many analysts said it appeared to be skewed by quirks in retail hiring and the way in which the Labour Department smoothed out seasonal fluctuations in the jobs series. - Reuters