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War on Iraq good for commodities

By Rob Hosking

Friday 14th February 2003

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Businesses are bracing themselves for the economic fallout from what looks to be an imminent war in Iraq.

Economists in this part of the world are now looking at the likely impact on New Zealand businesses.

There are two main areas of impact ­ "and both are already in play to some extent," ANZ Bank chief economist David Drage told The National Business Review.

"The most immediate one is the price of oil and that is already being felt at the pump. Where that will go depends very much on how the conflict pans out. If it's a short sharp war, once it becomes clear the US and its allies are going to achieve their aims we could see it fall again quite quickly.

"To some extent that will depend on what happens after any regime change: the Iraqi oil fields have the second largest reserves in the world and if this gears up "that would potentially the bolster prospects for an ongoing recovery of the world economy."

The other factor ­ again already very much in play ­ is the more intangible one of business sentiment. There is already plenty of anecdotal evidence of businesses holding off investment because of nervousness around what will happen if and when war starts.

It was not only Iraq that was affecting this mood, Mr Drage said. "Undoubtedly the uncertainty around geopolitical risks elsewhere ­ North Korea, India and Pakistan ­ along with the Iraqi issue are impinging on confidence in the major economies."

The confident presumption that any Iraqi conflict would be over quickly ­ and in favour of the US ­ could also turn out to be erroneous.

"You can't discount the risk, however unlikely it may appear, that this turns into a prolonged military conflict in the region. Or, even if it is short, we could have significant damage to oil infrastructure and that would mean the oil price stays high. That is the last thing a fragile world economy needs."

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