Getting ready for war

Manufacturing News, Source : The Manufacturer
Published : 15 Oct 2002 16:27

Business is accustomed to dealing with the unexpected, when a customer goes bust, or a sudden rise in the exchange rate wipes out the profit on a contract. War is different says David Smith

Planning for a war is harder than planning for business possibilities because the poss-ibilities, quite literally, are endless. When will it happen? How long will it last? What will the after-effects be? And so on.

We should also, however, have a sense of perspective. The last war fought solo by Britain against a foreign aggressor, the Falklands war, took place exactly 20 years ago. Defeat could have brought the Thatcher era to an abrupt end. Its economic effects were, however, negligible. Indeed the Falklands war happened at the time when the long 1980s’ upswing was getting into its stride.

More recently, there were gloomy voices ahead of the war to displace the Taliban regime in Afghanistan. There is unfinished business still in Afghanistan, but the gloom-mongers were entirely wrong.

Iraq is, of course, a bigger fish. The 1990-91 Gulf war pushed oil prices sharply higher and coincided with recessions in Britain and America. And that war was fought by a powerful international coalition, which will not happen this time.

Hindsight, however, can play tricks. Oil prices spiked higher then, but fell quickly back. Britain and America were heading into recession before Iraq invaded Kuwait. The international coalition provided moral supp-ort but little military help (the Gulf war was one of the few in which Britain has made a profit, being paid by Arab allies for our military efforts). Again, the climate of the time was one in which plenty warned of the direst consequences.

What are the likely economic effects this time? To a large extent, we are already seeing them. Disen-tangling war fears from other factors influencing growth and confidence is not easy but some broad conclusions can be drawn.

Business and consumer confidence would be higher if the threat of war was not there. The uneasy feeling that has been ever-present since September 11 last year has been preserved by all the war talk. Second, and related to this, stock markets would also be significantly higher than they are. Third, oil prices would be lower, possibly under $20 a barrel rather than $30 or more, given the weakness of demand.

This state of affairs will continue, either until there is resolution to the crisis through the meaningful readmission of arms inspectors or, more likely, until the ‘phoney war’ turns into a real one. The closer that gets, the higher oil prices will spike and the greater the nervousness, particularly in financial markets. In both respects, this has the makings of a jumpy winter.

The start of war itself, as in the case of the Gulf conflict, could mean that things start to look better quite quickly. Markets tend to look for-ward, pulling business and consumer confidence behind them.

So what’s my best guess? We are being encouraged to believe that a war against Iraq will begin early next year and be relatively short-lived. If that’s the case, the present uncertainty will give way quite quickly to optimism. It could even be the start of a new and sustained economic upturn, as happened a decade ago.

There are other possibilities. One is that, this time, the gloom-mongers really have got it right and the whole thing backfires, creating instability in the Middle East and raising doubts about America’s role, and her ability to pursue the other war, that against terrorism.

Another is that war worries are merely a convenient label for all sorts of other concerns, whether they are about over-capacity, the hangover from the 1990s’ stock market boom, deflation or accounting irregularities. If that’s the case, even a successful war against Iraq might not remove the uncertainties.

David Smith is economics editor for The Sunday Times

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