Tread carefully, was the message from market analysts in the United States this week.
As coalition forces swept into Baghdad, stock exchanges across the globe cheered and rallied. But the prospect of a large US budget overrun due to war spending, and the pneumonia scare in Asia, loomed darkly in the background.
Analysts cautioned against being carried away by the upswing, because the outlook for economic recovery remains murky.
“After the recent good news, the markets have started again to hope for a quick end to the war,” analysts at Deutsche Bank said in a briefing note. “However, sentiment can turn around very quickly, particularly if it starts to look as if taking Baghdad might be a long endeavour and cause many casualties.”
This week’s market gains could be short-lived because problems with the US economy are likely to resurface once the war stops dominating headlines.
Moreover, the underlying outlook for the global economy, and therefore corporate earnings, remains clouded by more than just the fog of war. US and European employment is dwindling. The latest reports show US employers slashed payrolls by 108 000 jobs in March. Businesses also remain reluctant to invest in new factories, and consumers on both sides of the Atlantic, who had been leading the tepid recovery, have zipped their wallets.
The trend is even worse in Europe and Japan, where growth has virtually come to a standstill. Tourism and travel through Asia are now being hurt by fears of the spread of the severe acute respiratory syndrome virus (Sars).
The big question is: will a rapid conclusion to the war set the stage for economic gain? Will it end the uncertainty that has virtually paralysed corporate executives, sending business spending, mergers and acquisitions, and share offerings into a tailspin?
Right now investors appear to be in a magnanimous mood, forgiving missed earnings, poor outlooks and revenue shortfalls, and returning to the stock market in anticipation of a burst of activity.
Economists trying to decipher how the post-war economy will play out are divided in their views. Some see the war causing recession, others believe it may stimulate the US and global economies. What they do agree on, though, is that it will take time and the price of reconstruction will be a key factor.
During a panel discussion at the Council on Foreign Relations in New York last week, Ethan Harris, chief US economist at financial services firm Lehman Brothers, said the war’s impact was “fairly easy to quantify in some regards and very hard in others”.
“The easier-to-quantify stuff is the impact on budgets.
“We know we are going to get big budget deficits out of this. We know we are going to have a big peacekeeping cost in any reasonable scenario. We also know pretty well how oil prices will affect the economy — a $10 increase [per barrel], which is our estimate of the war shock, strikes about half a percent from growth,” Harris said.
Other panellists said the heavy dependence of the stock market on war-related news — if headlines on a particular day look optimistic, markets go up, and vice versa — made it hard to conduct long-term economic predictions.
Harris said this trend would likely continue for some time. “The hardest stuff to measure is the psychological stuff and that, in fact, is what will distinguish a good from a bad forecast in terms of the outlook.
“In our view, [the war] is a major shock to the US economy. We think we will get only 1% growth in the first half of this year, coming from a trend of growth of about 3%. That’s not a very favourable outcome. And as long as the war goes on we are going to get recession-like readings for the US economy,” Harris said.
But he also said he thought some real recovery would come out of the war, in contrast to the repeated false starts the US had experienced in the past two years.
He attributed this to the expectation that the dollar would continue to weaken until the end of the year.
Stephen Roach, chief economist and director of global economics at investment bank Morgan Stanley, said his concern was the overwhelming US influence on the world economy.
Since 1995, it had accounted for 64% of the cumulative growth in world gross domestic product (GDP) at market exchange rates. Roach described this situation as “bizarre,” “ridiculous,” and “unsustainable”.
“I characterise the world as a very dysfunctional place right now. The US is the best of the lot, but we are going down a very reckless path [from] the standpoint of managing a savings-short economy and being increasingly dependent on the rest of the world to fund our excess consumption.
“Clearly, one leg the world had [to stand on] to keep the global growth rate in positive territory was Asia. And Asia has just gotten a huge punch right in the mid-section with this Sars-related disease. I think world GDP growth will be negative in the current quarter,” Roach said.
He said President George W Bush’s tax cuts and post-war rebuilding plans would result in an enormous budget deficit, with worldwide implications.
The impact on South Africa was still unclear. According to one Africa-watcher, one of the biggest worries was whether the war would hamper global recovery and weigh on the demand for minerals.
“If the double-dip recession is here to stay for a while, it will push out the demand for natural resources and impact the South African economy,” he said.
Trading volumes on the JSE Securities Exchange have also tailed off but it is not clear whether the reason is a bearish market or the war, says one industry insider.
However, South Africa is viewed as a safe haven for tourists, which could lift that segment of the market.