History is not always a reliable guide to the future. But the fact that every
global recession in the past 30 years has been preceded first by a crisis in the
Middle East and then a spike in the oil price does little to reassure those fretting
over the economic consequences of a war on Iraq. It may explain why the International
Monetary Fund, a body not given to exaggeration, warned last week that ousting
Saddam Hussein would not be "a very healthy development", and one that could lead
to the panic selling of shares. The fund's image of "fear feeding on fear" on
the world's stock exchanges emphasizes that the devastation would not be confined
to the Middle East. Although there may be political capital in equating the Iraqi
leader to Hitler there is none in comparing world war two's reinvigoration of
the US economy to any putative boost that America might enjoy if it bombed Baghdad.
The assessment this time is clearly tilting towards the view that a strike against
Saddam would be more of a burden than a boon.
The reason is oil, on which America runs. Contrary to hawkish opinion, a battle-scarred
Iraq - even a post-Saddam one sympathetic to the US - will not instantly produce
millions of barrels of oil, despite the country's extensive reserves. So oil is
unlikely to head down quickly apart from shedding the "war premium" currently
built into its price. But if the Iraqis lashed out at Saudi Arabian and Kuwaiti
installations crude, according to former Saudi minister Sheikh Yamani, could end
up costing $100 a barrel. This would not help Opec, whose members meet this week,
as high prices hurt oil-consuming, and hence oil-producing, nations. Experts reckon
that a $10 rise in the price of oil cuts more than 0.2% off growth in America
and Europe.
Any draining away of growth will come at a time when the strength of the biggest
economies is ebbing. American consumers are still spending on cheap Jeeps and
property, but the stock market is slipping ominously downwards. George Bush's
America is attracting less foreign direct investment, and is likely to produce
fewer patents than under Bill Clinton. The result is that the country is moving
from economic miracle - 3% growth a year for a decade - to mirage in one presidency.
If the US economy is spluttering, other economic superpowers are sinking. Europe
is struggling to export goods, and consumers appear reluctant to spend. Japan,
the land of falling prices and wages, appears incapable of reviving its own fortunes,
let alone the world's.
Previous experience may not be enough to avert disaster, as no recession is
the same as the last. Crises in the past have been marked by high inflation and
low growth, but today the shadow of deflation is being cast. Too many airline
seats, too much steel and too much unused airtime on telephones all point to a
collapse in prices in these goods. Rising oil prices at first spark inflation,
but end up being deflationary by reducing purchasing power. These two conditions
could usher in a very different downturn - one which policymakers have not dealt
with in Britain since the 1920s and in the US since the 1930s. The White House
ought to be worrying about how to reflate the economy when its parlous state will
have supplanted the war on terror in opinion polls. War will do more harm than
good to the US economy, and it is foolish to suggest otherwise. The 1973 Arab-Israeli
conflict, the Iranian revolution and the first Gulf war all punctured global growth.
The last of these saw George Bush's father win a war and lose an election. If
the president takes the battle to Iraq, he risks history repeating itself.
© Guardian Newspapers Limited 2002
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