A prolonged war in Iraq could trip the world into recession, the IMF warned today, as signs mounted that the conflict is hitting economic sentiment.
As the US-led invasion entered its seventh day, German business confidence sagged, British Airways stepped up job cuts and International Monetary Fund managing director Mr Horst Koehler said a lengthy war risked jeopardising global recovery.
"It depends on how long the war lasts and what damage there is. But even a short war is an additional barrier to a recovery in the global economy. The uncertainty is prolonged. Many market participants will continue to hold back," he said.
Battlefield developments have also made financial markets take stock. A powerful equity market rally has hesitated, the dollar trod water and oil prices have edged up - although they remain well beneath recent peaks from before the tanks started to roll.
But confidence is also key and businesses and consumers are nervous. Unemployment is rising - BA said today it would bring forward 3,000 job cuts because of Iraq - and this sort of negative news will be a brake on growth
In Germany, the Ifo barometer of business confidence unexpectedly dipped to 88.1 from 88.9, dashing hopes that the country's enfeebled economy was on the mend.
The IMF is due to publish its next forecasts in its semi-annual World Economic Outlook on April 9th.
According to recent newspaper leaks, it had planned to cut its global growth forecast to 3.3 per cent from 3.7 per cent. However, according to those reports, the IMF had still forecast positive growth even in case of a long war in Iraq.
Bank for International Settlements general manager Mr Andrew Crockett drew attention to another issue facing the world economy when he said the growing US trade deficit coupled with the nation's low savings rate were absorbing too much of the world's capital and were unsustainable.
"That cannot persist and eventually there will be an unwinding," Mr Crockett concluded.