Will Iraq War Give a Push to US Economy?

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Last updated at: (Beijing Time) Monday, March 24, 2003

Will Iraq War Give a Push to US Economy?

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Some people in the United States believed that as soon as the war on Iraq started, the US economy would get a boost as it struggles to recover. However, it remains to be seen whether this prediction will turn out to be correct.

As the long-debated US war on Iraq broke out on Thursday morning with missiles falling on the Iraqi capital Baghdad in a so-called surgical strike, many analysts wondered whether the war could give an immediate push to the struggling US economy.

The war began at a time when the US economy had been recovering, albeit with great difficulty, for more than a year. Troubled with corporate scandals, which resulted in the decline of consumer confidence and the plunge of the stock market, the recovery from the first US recession this century has been slow and unstable.

In the fourth quarter of 2002, the US economy increased at an annual rate of 1.4 per cent, much slower than the 4 per cent of the previous quarter.

Consumer spending, which accounts for two-thirds of gross domestic product in the United States and is also the main force for economic growth, rose at a rate of 1.5 per cent in the fourth quarter of last year, dropping sharply from the robust 4.2 per cent in the third quarter.

Uncertainties arising from a war against Iraq and soaring oil prices were the main reasons behind the slow growth.

Now, with the war raging on, the uncertainties are unlikely to be eliminated within a short period of time and the US economy might not benefit from the war immediately.

First, ousting Iraqi President Saddam Hussein could cost the United States US$40 billion or much more if the war drags on. The aftermath could be even more expensive, with the cost of rebuilding and securing Iraq potentially exceeding US$100 billion, according to analysts. It will be a great burden for the US Government, which is currently saddled with a huge budget deficit.

US President George W. Bush said in his budget proposal for the 2004 fiscal year that the deficit in 2003 could be as high as US$304 billion and the figure will jump to US$307 billion in 2004. If the cost of war is included, the deficit will increase to about US$400 billion. The soaring federal deficit will surely slow the pace of economic growth in the long run.

Second, world oil prices might not sink as sharply as many people have forecast. Some people said world oil prices would plunge soon after the war began and thus push the US economy forward. However, the situation in the world oil market, as well as in the United States, is quite different from that during the 1991 Gulf War, when oil prices declined by a big margin soon after the war began.

Commercial stocks of crude oil in the United States dropped to a 27-year low in early February and have remained at a low level since then. The soaring energy prices of the past several months have not only rapidly pushed up inflation, but also resulted in a sharp reduction in consumer spending on other goods.

Some people also pointed out that a possible disruption caused by the war against Iraq may not be compensated for soon enough by other oil-producing countries as most members of the Organization of Petroleum Exporting Countries do not have much additional production capacity. So the decline in world oil prices may not be as great as many people had expected.

Third, the United States will not benefit immediately once the war ends, even if it can disarm the current Iraqi Government within a few weeks. Facing a war-torn Iraq, the United States will first have to inject a great sum of money into the rebuilding of Iraq before pumping oil to its own market.

Analysts say the United States has to station at least 100,000 troops in Iraq to secure peace and spend billions of US dollars to rebuild the country. Having decided to keep the short-term interest rate unchanged earlier this week, the US Federal Reserve said that "the hesitancy of the (US) economic expansion appears to owe importantly to oil price premiums and other aspects of geopolitical uncertainties." The Fed stressed that policy-makers could not assess the future risks to the US economy given all the uncertainty over the Iraq situation.

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