A prolonged war in Iraq could have an enormously damaging effect on US economy and so damage UK companies, according to a report by The Institute of Directors (IoD).
The report, ‘War and the World Economy’, says that UK companies must be aware of the potential economic impact a war might have on the UK’s single largest export market.
In the worst case scenario - a prolonged Gulf War – the report concluded that oil prices could rise to $80 a barrel, make the US stock market fall by 30 per cent and the country's gross domestic product shrink by 2 per cent. But, it added, this scenario is unlikely.
A prolonged war would also have an adverse affect on European and Japanese economies because they have little leeway to ease monetary and fiscal policy in response to prolonged economic deterioration.
The best economic outcome, the report suggests, would be a short war and a regime change. In this event, it predicts that oil prices would rise briefly, then fall quickly to $20 a barrel. President Bush would also be able to gain Congressional approval for his recently announced package of tax cuts and the US economy would grow by 2.9 per cent.
"In economic terms, a short war is better than no war, or no regime change, because of the removal of uncertainty," the report said.
The report’s author, IoD Chief Economist Graeme Leach, said:
“There are tremendous military, political and economic uncertainties facing the US and world economy this year. The IoD has produced this report in order to help our members understand what might happen to UK export markets at this very difficult time. Our report will help people see how alternative scenarios could unfold.”