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British brace for fallout from war

The UK economy probably will avoid recession this year and cope with a possible war in Iraq better than the dozen nations sharing the euro, an economic researcher said.

The Bank of England has more scope to stimulate growth by cutting interest rates than the European Central Bank, while the UK government can boost spending more than Germany and France, Oxford Economic Forecasting Ltd said.

The comments suggest it would be politically easier for British Prime Minister Tony Blair to support a US-led military strike than his counterparts in France and Germany, whose economies are faltering.

"The UK economy is actually rather well placed to ride out the impact of a war and avoid a severe recession," said Adrian Cooper, an economist at Oxford Economic Forecasting. "The same cannot be said for other European countries."

The forecasts build on work done by the Center for Strategic and International Studies in Washington last year, suggesting oil prices -- which were about US$29 a barrel on Friday -- may surge to as much as US$40 a barrel in a "worst case scenario," if a war took Iraq's oil out of the market for most of this year.

Oxford Economic looked at the impact of a war with Iraq in three scenarios, and Britain's economy fared better than the euro nations in each case, the forecaster said.

A "benign scenario" in which a military strike concludes quickly would produce growth in the UK of 2.4 percent this year, double the 1.2 percent expansion forecast for the euro nations. Next year, UK growth of 3.2 percent would top the 2.5 percent pace of expansion in the euro region. The US economy probably will grow 2.6 percent this year and 3.7 percent next year, it said.

In a "worse scenario," Britain's economy would shrink 0.4 percent this year, less than the 0.8 percent decline forecast for the euro nations. The US economy may shrink 0.7 percent in that case.

Germany, Europe's biggest economy, probably would dip into recession, shrinking 0.3 percent this year, in an "intermediate scenario." The euro nations would grow 0.2 percent, less than the 1.2 percent pace in the US and the UK in that scenario.
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