Global economy may react to U.S. action against Iraq
By Farah Nayeri
Bloomberg News Service
LONDON — Fear of renewed terrorism a year after hijackers destroyed the World Trade Center and damaged the Pentagon is eroding stock markets, battering the airline, leisure and insurance industries and denting investment, interviews with world leaders and finance ministers show.
• Stock market: A year ago, the terrorist attacks wiped almost $1.38 trillion in value off the Dow industrial average in five days, leading to its biggest weekly drop since 1933. While U.S. stocks rebounded — thanks to 11 Federal Reserve interest-rate cuts that spurred consumer purchases of homes and cars — the Standard & Poor's 500 Index has lost 15 percent of its value this year, hurt by accounting scandals at Enron Corp. and WorldCom Inc., slowing growth, and fear of war. The yield on the U.S. two-year note fell to a 44-year low last week. • Airlines: The world's airlines probably will lose as much as $6 billion this year, the International Air Transport Association said, after losing $12 billion last year and firing more than 200,000 people. • Hotels: Worldwide, the industry is reporting its slowest year in six. The Bloomberg U.S. Lodging Index dropped 15 percent in the past 12 months, the U.S. index is down 10 percent and the Asian index 20 percent. • Insurance: The industry is hardest hit, with claims from the Sept. 11 attacks expected to exceed $35 billion. The Bloomberg Europe Insurance Index fell 40 percent this year. Zurich Financial Services AG, Switzerland's largest insurer, last week posted its biggest-ever loss and said it would cut 4,500 jobs. Some insurers now say they can't afford to shield clients against terrorist risk. • Real estate development: Treasury Secretary Paul O'Neill has said an estimated $8 billion in real estate development projects are frozen as a result of problems getting insurance under more stringent rules. "If they can't get the insurance," O'Neill said recently, "they can't create the hundreds of thousands of jobs for hardhats that would in turn help the economy."
"The terrorism of the 11th of September had a big economic impact," British Prime Minister Tony Blair said two weeks ago. "These questions may seem far away from our domestic national interests, but actually they're intimately connected."
Across the board, economic setback proves hard to reverse
The U.S.-led effort to combat terrorism has extended to Iraq, which President Bush says produces weapons of mass destruction. Speculation about a U.S.-led invasion is drawing cash from stocks into bonds and propelling oil prices up 50 percent, to more than $30 a barrel.
That could stunt global growth, which Lehman Brothers Holdings Inc. sees at 1.2 percent this year, up from last year's 0.7 percent.
"If the U.S. decides to attack Iraq, it will affect the whole world," Thai Prime Minister Thaksin Shinawatra said. "Oil prices will certainly rise, and that will slow our economic growth."
Leaders from Bush, who faces November congressional elections, to German Chancellor Gerhard Schroeder, who seeks re-election Sept. 22, are trying to meet higher security costs without breaching deficit limits, raising taxes, crimping the economy or upsetting voters.
Also at play is the future of the world economy. A protracted war in Iraq and retaliatory acts of terrorism could scare away shoppers, who have acted as the chief engine of growth in the last year.
"People aren't just robots, and economies are about human behavior," said John Hatherly, who helps manage $186 billion at M&G Investment Management in London. "Given the U.S. consumer is holding the world up, any threat to that is negative."
European central bankers have ruled out a recovery until next year, and growth this year will be less than 1 percent by most estimates.
"If America decides to take military action against Iraq, it wouldn't be good news economically for Europe, or for Africa, or for the world," said French Finance Minister Francis Mer.
Japan, meanwhile, is poised for zero growth this year, according to economists' estimates.
"Globally, the threat of terrorism is like a sludge that oozes instability throughout the world," Japanese Finance Minister Masajuro Shiokawa said two weeks ago. "It's very troublesome that terrorism is creating such enormous instability."
That places the onus of a global rebound back on the United States.
Also, while soaring oil prices benefit some Middle Eastern oil producers, the region is stinging from the aftermath of Sept. 11 and from the Palestinian uprising of the last two years.
Israel's economy was in recession last year, and shrank again in the second quarter. The conflict has also triggered a "severe recession" in Palestinian-controlled areas, pushing half the population into poverty, according to a March World Bank report.
Nor are Asian economies immune to the effects of terrorism and war. In the aftermath of Sept. 11, Japan's Nikkei 225 stock index fell to its lowest since December 1983. The following quarter, China grew at its slowest quarterly rate in two years.
Asian economies have their own homespun conflicts to worry about.
