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Friday, April 9, 1999 Published at 17:47 GMT 18:47 UK

Business: The Economy

The cost of war

Aerospace companies may benefit from more spending

The Kosovo conflict is likely to have a minimal impact on the economies of Nato countries, according to US investment bank Lehman Brothers.

While aerospace and defence related companies have seen their share prices rise sharply since the first air strikes the overall impact on financial markets has been minimal.

John Llewellyn, chief global economist at Lehman Brothers, estimates that the air campaign will cost around $3bn per month.

[ image: A British Aerospace craftsman at work]
A British Aerospace craftsman at work
The humanitarian bill for re-housing and feeding two million displaced people is likely to be four times that amount, he says.

But this total is not enough to impact on the domestic economies of Nato member states, with the $15bn figure equal to 0.01% of their combined gross domestic product (GDP).

"I think in all honesty that this is not expensive in relation to the GDP of Nato countries," said Mr Llewellyn.

Euro is hit

"We do feel that we can identify a discount in the euro, although we are not absolutely sure how large it is. One or two per cent lower than it would have been without the war."

The minimal effect on the domestic economies of Nato countries contrasts with the much higher relative bill from the First World War which cost $2,850bn in 1995 prices and the Second World War which cost the 1995 equivalent of $16,000bn.

The Gulf War cost $102bn, reflecting the larger cost of a ground campaign, while the Korean War cost the 1995 equivalent of $340bn.

Defence stocks rise

Mr Llewellyn said: "Thus the war over Kosovo seems ... unlikely on present trends to warrant any significant impact on either the public finances or the financial markets of Nato countries."

Despite the uncertainty over the length and nature of the conflict, there was an immediate lift in aerospace and defence industry share prices when the air strikes began.

Compared to the middle of March British Aerospace was up from 390p to 425p on Friday, Rolls Royce up from 253p to 275p and Smiths Industries up from 855p to 910p.

Long term benefits

Clive Forestier-Walker, aerospace and defence analyst with Charterhouse Securities, said: "All defence stocks tend to go up in times of conflict. The notion is that there will be extra business.

"However stocks of munitions are quite high in most cases so it is not a huge bonanza. It quite clearly depends on how long the conflict runs."

With little Nato equipment being destroyed and large stocks of both aircraft and missiles, he said that there was more likely to be a longer term benefit for the defence industries.

"It reinforces a number of defence programmes and strengthens the resolve to equip the military properly," he said.

The defence sector is currently going through an upbeat period, said Mr Forestier-Walker, with a number of projects such as the Eurofighter coupled with an increase in the US defence budget.

Costs can not be predicted

However Digby Waller, defence economist at the International Institute for Strategic Studies, said that it was too early to start putting a cost on the conflict which could yet take three different forms.

These were, respectively, air strikes and a short campaign lasting weeks, a longer campaign of air strikes lasting months or air strikes plus a ground campaign.

"The costs associated with any of these three options are very different. But the costs are likely to be substantial whatever happens."

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