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Economic prospects hang on invasion

The global economy's prospects this year hang on the timing, length, and outcome of US invasion of Iraq, according to business and political leaders attending the World Economic Forum.

"The missing ingredient in the economy is business investment," said Frederick Smith, chief executive officer of FedEx Corp, the largest overnight-delivery service. "The big issue, the elephant in the room, is: `Does the international situation deteriorate?'"

A war of maybe six months or longer may increase the possibility of more terrorist attacks. That would likely drive up oil prices, depress consumer and business spending and push stock prices lower, the business leaders said.

A short war ending in a US victory would likely raise confidence and spending in the aftermath, leading to increased business investment and a more rapid global expansion. The world economy will grow by 2.5 percent this year, the World Bank says.

While US officials have said an invasion is not inevitable, concern over the possibility has boosted oil prices 38 percent since mid-November, to over US$33 a barrel, and sent stock prices tumbling.

The Dow Jones Industrial Average lost 5.3 percent last week, almost wiping out its entire gain for the year.

``Companies are naturally reluctant to spend in that kind of situation,'' said Bertrand Collomb, chairman and chief executive officer of Lafarge SA, the world's largest maker of building materials.

Investment in plants, equipment, and software declined 5.1 percent in the US from the third quarter of 2001 to the third quarter of last year. Factory orders fell in November for the third month in four, with companies reluctant to boost orders until spending rises. Shipments of computers and electronic goods fell 0.5 percent.

"The majority of CEOs I talk to across America are going to be conservative in their spending, even employment, until they see the economy turn up," said John Chambers, chief executive officer of Cisco Systems Inc, the world's biggest maker of computer servers.

Battered by an unemployment rate that's at an eight-year high of 6 percent, American consumer confidence is falling. Retail sales in the US rose 1.2 percent in December, less than expected.

"I worry about business spending not picking up before the consumer runs out of gas," Chambers said.

Any slowdown in US growth would be bad news for the rest of the world. Since 1995, the US has accounted for 64 percent of cumulative world GDP, according to Morgan Stanley Chief Economist Stephen Roach.

Lower US consumer spending could cause European economies, already struggling to grow at all, to contract. European business investment grew just 0.1 percent in the third quarter after falling for six consecutive quarters.

"You don't hear many optimistic voices here," said Royal Philips Electronics NV Chief Executive Officer Gerard Kleisterlee.

"We have to get Iraq and the Middle East behind us."

Trade has been the one bright spot for the 12 countries that use the euro, with their external trade surplus reaching 9.2 billion euros in November. Yet war concerns are pushing the euro's value higher, making European exporters less competitive. The US currency lost 1.4 percent against the euro last week, dropping to a three-year low of US$1.08 per euro in New York.

Siemens AG management board member Volker Jung said in Davos that export orders are starting to erode at Germany's largest electronics and engineering company.

"It's a problem at all our European production sites," he said.

The German economy, which accounts for a third of euro-area GDP, stagnated in the fourth quarter, and "prospects for this year are not good," Caio Koch-Weser, Germany's deputy finance minister, told the annual gathering.

Higher Euro Investors expect the European Central Bank to cut interest rates again after trimming its main rate by a half-point to 2.75 percent in December. Sustained high oil prices because of a war might upset that scenario by raising the possibility of accelerating inflation. European rates compare with the US Federal Reserve's benchmark rate of 1.25 percent and rates of close to zero in Japan.

That, in turn, would likely push the euro even higher, "which can only harm growth," said Juergen von Hagen, a professor of economics at the Center for European Integration Studies at the University of Bonn.
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