Jim Eagles: War fallout a slippery call

What effect might a second Gulf War have on the New Zealand economy?

Might as well ask what the weather will be like at Easter? There are too many unknowns.

Even without a war it is unclear whether the US dollar will continue its orderly decline, global markets have bottomed out, or another corporate scandal looms to puncture investor confidence.

If there is a war, will it have the endorsement of the UN Security Council? How long will it take? What will be the effect in other Arab countries? How soon might Iraq return to some sort of normality?

A quick, surgical strike leading to a regime change in Iraq and then business as usual would almost certainly be good for the global economy. But a messy, protracted war, uprisings in other Arab countries and disruption to oil supplies could plunge the world into recession.

ANZ Bank chief economist David Drage, who did a presentation on the topic to a seminar on "Business in the New World Disorder" in Auckland yesterday, said afterwards that he was "more than usually embarrassed" in offering predictions because "the number of imponderables is high even by the standards of economists".

In his role as reluctant prophet, Drage told the seminar ANZ was assuming a 20-30 per cent chance of a diplomatic solution, in which case oil prices should gradually fall and the global economy start recovering from the third quarter onwards.

There was a 50-60 per cent likelihood of a short war, resulting in oil prices falling more quickly and the world economy growing from the second quarter.

But in the 20 per cent likelihood of a protracted conflict oil prices could double, plunging the global economy into a downturn.

Drage said New Zealand "will be going into whatever happens from a position of some economic strength". But as to the impact on business in New Zealand, your guess is as good as his.

Until that uncertainty is resolved, investor confidence in New Zealand and the world is likely to remain fragile.

Herald feature: Iraq