War danger is eroding business confidence in the US, says economist
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| Wall Street's eyes are on the Middle East |
Paris, 28 November 2002 - The threat of war with Iraq is hanging over the United States economy, eroding business confidence and inhibit
ing corporate decision-making. But the business climate will start to improve once the threat is removed.
This assessment of the economic outlook in the US was given by Sung Won Sohn, Executive Vice-President and Chief Economic Officer of Wells Fargo Bank, at a meeting of ICC's Corporate Economists Advisory Group (CEAG).
CEAG brings together corporate economists from around the world to analyse global economic trends for ICC member companies.
Dr Sohn said business confidence would be key to avoiding a double dip recession in the United States, adding: "Confidence is low because of the uncertainties." He said: "Once the Iraqi situation is out of the way, say in the next six months, people will start to feel better."
Major uncertainties were whether any war would be short or prolonged and the extent of casualties, especially if there was urban warfare. A conflict could involve expenditure of hundreds of millions of dollars to support Iraq when peace was restored and to cover the costs of post-war nation building.
Unlike the first Gulf War more than a decade ago when the impact on the oil price was negligible, a new war would risk prices rising to high levels and remaining high for longer. Already there was a war premium of $5-6 in the oil price.
Businesses were laying off workers, refraining from buying equipment and cutting costs, Dr Sohn said. Despite the fall in share prices, the market was reasonably valued or even too expensive.
The prospect of deflation was becoming an issue. Dr Sohn differentiated between 'good' deflation resulting from productivity gains and competition and said this was not to be discouraged, and 'bad' deflation caused by lack of demand, over-capacity, and retrenchment, as Japan had experienced. "It can take decades to get rid of it," he said.
Meanwhile, housing prices were "sky-high" across the nation, and people were finding that they could not afford to buy homes although they had come to "use their houses as ATM machines (cash dispensers)". While the purchasing power this releases was holding up the economy for the moment, a generalized collapse in house prices - though unlikely -- would have a greater negative impact on the economy than the stock market plunge.
Dr Sohn described corporate malfeasance as an important reason for the stock market crash, but added that a big improvement in company behaviour could now be expected after the wave of scandals. "I predict that from now on accounting numbers will be squeaky clean, erring on the side of conservatism," he said.
CEAG members gave the following assessments covering other regions:
Latin America
Mexico is suffering from the slowdown in the US economy, Dr Sohn reported. Domestic consumption remains healthy but exports are falling. US companies are leaving the Maquiladoras to move further inland or to China, where labour is cheaper. Mexico benefits from high levels of foreign investment, including in the financial services sector, which provides high rates of return. The economy is generally well managed, but job creation remains low and proposed tax reforms have not passed into legislation since President Vicente Fox lacks political support in the Congress.
In Brazil, business is now resigned to working with President-elect Lula da Silva.
The stock market has even gone up since the elections. However, the post-electoral "honeymoon" between the President-elect and Brazilians may not last. Austerity will soon become inevitable in order to reduce the public debt, which account for 55% of GDP (more than in Argentina before its crisis). With 43% of its debt tied to the US dollar, Brazil is very vulnerable to a fall in the value of its currency.
Argentina, with a 11% economic decline this year, is going through a depression. There is now a general stabilization at a bottom level and bank deposits have even started to increase slightly. Long-term structural problems remain, with the banking system being literally frozen.
India
Economic growth this year is expected to be between 5% and 5.5%, Ashok Ummat of ICC India told the group. Inflation is significantly lower than last year and exports are on an upward trend. However, the fiscal deficit remains above 5%. Foreign direct investment is increasing but would double if labour laws were less stringent and infrastructure more adequate. New reforms to labour laws, taxation, infrastructure and interest rates on house loans should therefore help stimulate the economy in the years ahead. Agriculture is still a major sector but its impact on the Indian economy is declining relative to the services sector, Mr Ummat said.
Middle East
Uncertainties due to political turmoil in Israel/Palestine and Iraq are dragging down the economy of the whole Arab region, Louis G. Hobeika of Sodetel, Lebanon, said. Lebanon, Syria and Jordan are all in the midst of recession. Egypt faces high unemployment and has had to devalue its currency several times. Participants were all agreed that peace would greatly benefit the economy of the entire region.
Moshe Sanbar of ICC Israel, said that in his country, GNP per capita has decreased by 2% this year. The economic slowdown is mainly due to the Intifada, which jeopardizes industries like tourism and real estate. The information technology sector is also suffering, although foreign companies looking for high skilled labour keep investing in Israel. Israelis are slowly withdrawing their investments in Egypt and Jordan and reinvesting their money in Israel.
Europe
Lack of business confidence, high oil prices and depressed stock markets have led the EU to downgrade its forecast for economic growth in the Euro zone in 2003 from 3% to 1.8%, Guy Sebban of Aventis said. Inflation should be around 2%. Nevertheless, one million jobs are expected to be created in the EU next year.
In Germany, the 3.8% deficit exceeds the limits set by the EU's Growth and Stability Pact, Gregor Eder of Dresdner Bank said. The government is raising taxes to increase its revenues but is failing to cut expenditures. Christian Serres of the ICC International Secretariat said that while France enjoys low inflation, high levels of foreign investment and a positive trade balance, the economy is suffering from large social security and budget deficits and a depressed stock market. In Italy, growth forecasts have progressively declined over the year, down to 0.6%. Production, investment and exports have all performed poorly, but a slow recovery is expected from next year on.
Figures are slightly more positive in northern Europe and outside the Euro zone. Donald Hepburn of Unilever said that after 1.5% growth this year, the United Kingdom expects to reach 2.3% in 2003. There are great concerns, however, over the housing price bubble and household debt, which are at all-time highs. In such conditions, the Bank of England cannot afford to cu
t interest rates further.
Ulf Jakobsson, of Sweden's Research Institute of Industrial Economics, said his country's economic growth will reach 1.5% this year, despite difficulties in the telecom sector and the ABB crisis. Wages have increased, but as the country prepares to join the Euro, the government has to slow down its expansionary spending policy. In Finland, private consumption and trade, especially with Russia, have been fuelling economic growth, according to Jukka Kero, of the Central Chamber of Commerce of Finland. Nils Terje Furunes, of Union Bank of Norway, said that increased purchasing power in Norway has also stimulated growth, and the central bank had to lift interest rates to prevent an overheating of the economy.
ICC's Corporate Economists Advisory Group