The coming months will tell whether Iraqi war is a major block to economic revival, writes Cliff Taylor
This year was to have been the one when the recovery took hold internationally. But the threat of war, combined with the lingering after-effects of the boom years, has put everything on hold.
Uncertainty is now king, delaying investment projects, unsettling consumers and deterring investors.
In the short term, the course and duration of the war are key factors for the economic outlook. Beyond that, the wider political and diplomatic fallout could have significant economic consequences.
The war will determine "the pattern of international politics for the next generation," according to Mr Tony Blair. If this is correct, then it will surely also have a fundamental influence on economic affairs.
Inevitably, the economic impact will be interpreted first through developments in the markets. In recent days share prices have risen as investors have been betting on a quick war, followed by a return to economic growth and the end to a three-year losing run on the equity markets.
By yesterday, however, the markets were again starting to focus on the risks.
"It is truly an extraordinary leap of faith for investors to conclude that American military supremacy will lead to the perfect victory - an outcome, which can then be seamlessly translated into economic and financial market vigour," warned Mr Stephen Roach, chief economist with Merrill Lynch yesterday.
Senior Federal Reserve Board governor Mr William McDonagh warned that war was not the only thing standing in the way of recovery, with the fallout from corporate scandals still weighing on confidence.
The key market to watch, of course, will be oil. The most direct impact of the war on economic prospects is through oil prices.
Perhaps surprisingly, crude oil costs have fallen back somewhat as the war commences, in the hope that the Iraqi shortfall - around two million barrels per day - will easily be made up by Saudi Arabia and that there will be no long-term disruption to supply.
Looking beyond the war, many analysts believe that prices can fall to lower levels later this year. Any prolonged surge in oil prices, however, could do serious damage, though prices rose only modestly yesterday despite reports that the Iraqis were setting fire to some wells.
While the oil price is the clearest measure of the likely short-term economic impact, other factors may be just as important, if more difficult to measure. There is clearly a short-term impact on industries such as tourism and airlines, which will worsen considerably if the war becomes drawn out.
Some analysts have also raised concerns about possible disruption to trade flows between the Far East and Europe, much of which flow via the Middle East through channels such as the Suez Canal. For this to happen, the conflict would have to spread,though insurance costs are already reflecting the danger and many industries with Far-Eastern suppliers are stockpiling supplies.
Perhaps hardest of all to measure is the impact on sentiment. Confidence is already fragile. Hit by falling share prices and the excesses of over-investment during the boom, businesses are nervous and have ready been forced to retrench.
Major investments are simply on hold. This blockage to growth will not be lifted until the war ends - and could be damaged by its fallout. For the world economy to progress, a US recovery is essential and analysts are concerned that a further fall in consumer confidence, in particular, could prove damaging.
While minds are now focused on the war, the uncertainty facing business may not end when hostilities finish. Quoted in yesterday's Financial Times, the Italian businessman and deputy chairman of the European Round Table of Industrialists, Mr Carlo de Benedict, said: "This is not just about Iraq; uncertainty will still be there afterwards, whether this is a seven-day war or a three-week war - especially if America causes widespread Islamic resentment."
Already fears have been raised of terrorist attacks on US or UK interests - with the US moving its security to code orange. And the wider fallout for the Middle East and for international diplomatic relations are bound to affect the economic outlook.
The unpredictably of the fallout from war is a key contributor to the current economic uncertainty. The war is taking place in a region with two-thirds of the world's oil reserves. And there is a risk of instability being triggered in neighbouring countries.
Amid this geo-political uncertainty , one thing is clear. The US move to war has driven a wedge between the Bush/Blair axis and France and Germany. And this could have far-reaching implications for economic relationships.
Amid reports of the replacement of French fries with "freedom fries" across the US, French business leaders have gone out of their way to put forward a picture of "business as usual". German car makers fear that BMWs and Audis may not sell well in the US. There is gossip in the market that US investors may not subscribe to a big debt issue due from France Telecom.
It would seem unlikely that consumers would generally start to link purchases with political factors - at least for a prolonged period. And it is scarcely conceivable that big investors would weigh up a financial issue on anything but profit grounds. Nor are multinational businesses likely to disrupt their investment plans on the basis of who did or did not support the war. The US government may become more isolationist, but its industries still want to conquer world markets.
However politicians may have longer memories and such is the bitterness of the trans-Atlantic falling out, that it is difficult to see a quick return to the previous pattern of economic relations.
Take world trade, for example. A new round of talks - the Doha round - is now under way, designed to reduce tariff barriers further and boost investment and growth. The Uruguay trade minister chairing the discussions, Mr Carlos Perez del Castillo, has warned, with no little understatement, that "war will not be positive for the negotiations."
Already the talks are in trouble and it is difficult to see the US and EU negotiators working up much of a rapport for some time. It would be far too early to write off the talks, but the risks of failure would be substantial.
Similarly, the G7 structure, which acts as a forum for discussion on issues such as exchange rates, may come under strain. It is difficult to see the US being too concerned about the impact of dollar weakness on European industry, for example. And what are the implications for EU integration and for monetary union of the fault-line splitting the EU? What odds now on the British government signing up for a currency whose interest rates are set in Frankfurt?
The next few weeks and months will tell a lot: are we seeing a war that, when over, will allow normal economic transmission to be resumed and a return to reasonable grow rates, or will what is now occurring create risks and new dynamics that can as yet only be guessed at?
