Test for world economies


THE WORLD’S fragile economies may be tested to the hilt and could be faced with greater uncertainty even if the US-led forces achieve a quick victory in Iraq, economists said yesterday. A prolonged war, meanwhile, “guarantees recession”. 

Although a much hoped-for “short war” of a few weeks could lead to a rebound in the world’s stock markets, the inevitable presence of American troops and authority in the Middle East over the longer term could lead to backlash and terrorist activity, fuelling more uncertainty for the world’s major economies. 

Geoffrey Barker

The cheaper oil that may result from a US victory could trigger a short-term cyclical rebound, particularly in the US, but over the longer term, economists were sceptical that the war would have any significant positive long-term economic impact. They have shaved up to 1% from their global growth forecasts this year. 

According to the economists contacted by StarBiz, the weak economic signals shown by the US were more fundamental and unlikely to be reversed by a victory in Iraq and the cheer of cheap oil alone. 

“It wouldn’t change the worrying economic dynamics that have been unfolding long before Sept 11,” said OCBC Investment Research director Lim Say Boon, commenting on the US economy where recently released manufacturing and services industry data indicated weakening, while consumer confidence fell sharply. 

On the first days of war, however, the immediate concern among some economists appear to be global security and fear of the implications of what Lim called a “wildcard scenario”. 

Calculating the probability of a missile loaded with chemicals or biological agents landing in Turkey, Kuwait or Saudi Arabia at between 10%-20%, Lim said the massive backlash that could ensue, resulting in the toppling of some US-friendly governments in the Middle East, would be a major risk. 

Morgan Stanley chief economist Stephen Roach said he was very concerned “over the path to that end game”.  

He said Saddam Hussein’s use of weapons of mass destruction could not been ruled out. 

Roach said the split between the US and its allies - not just many key European nations but also several Asian states - only heightened the geopolitical instability factor. 

Around Asia, the most vulnerable economy could be Indonesia where protests might erupt among extremist groups to create political and economic turbulence.  

In North Asia too, the risks of a simultaneous military build-up in North Korea may cause concerns and affect economic activity, particularly in South Korea and Japan. 

“Nor can we speak with any certainty about the stability of a post-Saddam administration in Iraq - especially against the backdrop of an increasingly unilateral military action led by the US. 

“Little wonder that confidence has been so shaken,” Roach said, adding that Morgan Stanley had cut its baseline forecast of global GDP growth in 2003 by 0.4% to 2.5% from 2.9%, as well as trimming its 2004 estimate of world growth to 3.8% from 4%.  

“That brings the cumulative downward revision to global growth to 0.6 percentage point over the 2-year period - one of the largest cuts we have ever made,” he said. 

BNP Paribas, meanwhile, said the war would shave 1% off its forecast of the world’s GDP growth rates in early 2003 (although a “quick war” could boost it by a similar margin early 2004).  

The bank added that the war would have “a negative long-run effect on growth” as resources are moved away from private investment to defence spending. 

Asia Pacific chief economist Richard Freris said consumption would likely be reduced directly by uncertainty about future incomes and by lower real household incomes caused by higher oil prices.  

HSBC chief economist Geoffrey Barker said a global economic slowdown was inevitable.  

“The underlying problems facing the global economy existed before the Iraqi conflict began and will most likely bring a downturn in global activity in any case.” 

Barker said the major issues were an excess in (production) capacity worldwide and the lack of corporate profitability in the US, Japan as well as in certain parts of Asia and Europe. “A long war guarantees recession,” he said. 

China, the star economic performer in Asia over the past few years, may also not be immune to the impact of a global slowdown. Sky-high oil prices were already taking a toll on the country’s rapid growth rates as the country is a significant oil and resources importer. 

Post-war, OCBC’s Lim said, the US economy and global markets were likely to rebound.  

“Consumer confidence will come charging back.,” he said stressing, however, that this was likely to be a short-term response. 

HSBC’s Barker said countries that would do well post-war are ones that could stand on their own two feet and did not rely too heavily on external demand. Relatively low debt and fiscal flexibility would be an advantage, he said, adding that Malaysia had some of these qualities but was bound to be affected by global industrial weaknesses. 

According to Morgan Stanley’s Roach, the US, faced with low national savings, record current account deficits and private debts, would be unlikely to fare well in the longer term. He said that contrary to beliefs that a war in Iraq would boost US growth, it could result in the reverse, believing the risk of a recession to be very real. 

“And rest assured, if the US goes back into recession, the global economy will be quick to follow,” he said. 

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