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Friday, 8 November, 2002, 12:31 GMT
War in Iraq and the economy


Will a war against Iraq cause major damage to the world economy?

Unlikely, say some economists, provided the war lasts only a short time and does not seriously disrupt oil supplies.

That is the conclusion of a study by the Economist Intelligence Unit (EIU), and back up similar studies compiled by the US Congressional Budget Office.

However, other economists are warning that the economic effects could be vast and negative, including lower growth, higher inflation and higher unemployment in Western countries.

Indeed, the US central bank, the Federal Reserve, warned on Wednesday that "geopolitical uncertainty" was the main factor in its decision to cut US interest rates by a half-point to 1.25%.

The Fed said that uncertainty over the course of any war was already reducing business investment and consumer spending, and spooking financial markets.

Indeed, the fact that global stock markets remained nervous despite the big Fed rate cut, can partly be attributed to worries about the war.

It should not be forgotten, though, that back in 1991, during the first Gulf War, markets and investor confidence quickly recovered once the military ground campaign began.

And US consumer confidence, which has also been fragile, may be more related to the weak unemployment situation than rumours of war.

Rumours of war

Most economists agree with the EIU forecast that the world economy will recover somewhat in 2002, growing by 2.7% compared to 2.0% in 2001, and accelerating to a projected 3.6% in 2003.

The big uncertainty is what will happen to the price of oil

Oil prices are hovering around five month lows, following reports that the Organisation of Petroleum Exporting Countries (OPEC) will not impose limits on overproduction.

The price of Brent crude oil has fallen by 25% since its September peak of $31 a barrel, because of overproduction and a belief that Saudi Arabia will make up any shortfall caused by the war.

According to the EIU, the oil market has already factored in a temporary rise in prices to around $35-$40 per barrel for a few weeks, should war break out.

But it believes that once the war starts, and it becomes clear that supplies will be maintained, prices will fall back sharply.

The think tank estimates that higher oil prices caused by the fear of war have led to a reduction of about 0.2% in the growth rate of the OECD group of industrial countries so far.

But it points out that in the long-run, the reconstruction of Iraq's oil fields - the world's second largest after Saudi Arabia - should boost world oil production and lead to lower prices.

Regional effects

However, the effect of oil prices will be felt differently around the world.

Least affected will be the United States, where the government has a huge strategic oil reserve and has been busy developing alternative supplies of oil from Africa and Latin America.

Europe, and especially Japan, are much more dependent on Middle East oil, and could suffer more.

However, all the big industrial countries have taken steps since the oil crises of the 1970s to dramatically reduce their dependence on oil.

Most developing countries, though, are not so lucky, and they would be the biggest losers if the oil prices stayed high for several months.

UK at risk?

The UK is self-sufficient in oil because of the North Sea.

But some economists argue that this will not be enough to spare the UK economy from feeling the effect of a war.

Neil Blake of Experian Business Strategies says a rise in oil prices to $40 a barrel could cost 250,000 jobs in the UK and delay economic recovery by six months.

"Consumers would cut back on spending and firms would scale back their investment plans," he said.

Experian says that it projects UK economic growth of just 1.5% this year, below the government's forecast of 2% to 2.5%, before recovering to 2.5%.

But speaking on BBC Radio 4's Today Programme, economist Doug McWilliams of the Centre for Economic Research disagreed with these projections.

He said only a few tens of thousands of jobs would be at risk, and that the UK economy could easily withstand the shock of higher oil prices.

However, the EIU points out that there will be real costs for companies, especially multinationals, who will have to increase security in the light of any attack on Iraq.

Analysis of the oil market, OPEC, and the alternatives

Key stories:

Analysis

Background
See also:

17 Oct 02 | Business
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25 Sep 02 | Business
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