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Tue, May 13, 2003 - Page 12 News List

Postwar expansion is unlikely

PRECEDENT FAILS Analysts believe that slagging consumer demand, coupled with excess capacity, will prevent the world economy from gathering the blessings of peace


World economic growth after the Iraq war will lag the expansion that followed the 1991 Gulf War as consumer demand slackens and companies from UAL Corp's United Airlines to Fiat SpA struggle to slough off excess capacity and boost profits, economists say.

After then US President George H.W. Bush launched an attack on Iraq in January 1991, the Standard & Poor's 500 Index soared 18 percent in a month, consumer confidence jumped and companies boosted investment. That set the stage for employment to begin rising within a year as the world economy grew 4.5 percent in 1991 and 6.6 percent the next year.

This time, the S&P has risen 7 percent since the Iraq conflict erupted March 19. Manufacturing has been contracting since February, companies are keeping a lid on spending and American workers are still losing jobs because of excess capacity and higher productivity. World production of goods and services may rise just 3.2 percent this year and 4.1 percent in 2004, according to the International Monetary Fund.

"We have a lot more baggage coming out of this one than we had coming out of the first" Gulf War, said Cynthia Latta, an economist at Global Insight Inc in Lexington, Massachusetts.

"We have the stock market collapse. We've had bigger job losses this time than we had before. We're more at the mercy of global economic winds than just our own economic forces," he said.

As the rest of the world counts on the US, the largest economy on earth, to lead the way out of a global slump, American manufacturers, software makers and telecommunications companies continue to close plants and fire workers. General Motors Corp and Ford Motor Co are holding down inventories by temporarily closing plants.

Steve Ballmer, chief executive of Microsoft Corp, the world's biggest software maker, last week said he doesn't see strong demand in the world market. AT&T Corp, the biggest US long-distance telephone company, said it is eliminating management jobs to cut costs.

SARS has emerged as a threat, especially to the airline and tourism industries. The WTO last month said the volume of goods carried around the world will rise less than 3 percent this year, down from the 5 percent it forecast in March, because of SARS, sluggish economies and the Iraq war. East Asia's economic growth will slow by about one percentage point from last year's as SARS curbs tourism and hurts commerce, the World Bank said last month.

"We still see uncertainty, a reluctance to invest and low growth with the risk on the downside," said Daniel Yergin, the chairman of the Cambridge Energy Research Associates consulting group. He cited SARS and the threat of terrorism as "sand in the gears" of the world economy.

"There is a kind of pessimism in boardrooms, extreme caution and a concern that the American consumer may be maxed out," he said.

At the end of the 1991 Gulf War, business investment accelerated to double-digit rates within a year. It may have helped that the end of that war coincided with the end of the first US recession of the decade.

The world is different now. This year's war in Iraq started 18 months after the US economy resumed expanding following the recession that began in March 2001. The private group of economists that dates business cycles, the National Bureau of Economic Research, has never declared that downturn over, partly because companies are still unwilling to add employees or invest.

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