RBA's McKibbin sees long slowdown

Source: Reuters

The war could milk US$240 billion from the global economy in 2003 alone and world growth is likely to come in below two percent this year, the Reserve Bank of Australia board member Warwick McKibbin told Reuters in a telephone interview.

In a worst case scenario, the conflict could cost US$3.5 trillion over 10 years, and even a short war could cost US$1 trillion over a decade, factoring in peacekeeping and the damage to consumption.

"I don't think we'll see a strongly growing world economy for another couple of years," said McKibbin, who is also professor of economics at The Australian National University and a senior fellow at the Washington-based Brookings Institution.

"This war shock -- particularly the oil shocks and the shocks to global equity markets and the wealth effects from that -- have put this negative impulse into the world economy for a number of years," he said.

In the worst case, the war could rip 0.75 percentage points from world growth each year for three years, McKibbin estimated.

Meanwhile, inflation would probably gather pace in the United States in the next few years as it financed a large fiscal deficit, tax cuts and the war, while global deflation was "very unlikely," he said.

SURVIVOR

The U.S.-led war in Iraq, which entered its sixth day on Tuesday, was preceded by rocketing oil prices and a malaise in equity markets.

"It doesn't create a recession. It creates a slowdown in the world economy which was already under way because the oil price and the uncertainty have been with us since October last year. The lag effects of the initial shocks are already in the system," McKibbin said.

Australia would be impacted by slower world growth but was protected by its strong and flexible local economy and freedom from the asset boom-and-bust cycle seen in other countries in the late 1990s, he said.

"Our trade sector is only 20 percent of our economy, we can survive through any sort of global downturn. We never had the big upsurge in equity values with the dot-com boom. People have maintained their confidence in the economy. The Americans overshot by a long way and I think that adjustment is still playing its way out."

In the United States though, McKibbin expected oil and equity markets to remain volatile because of the fighting, uncertainty over costs and over who would replace President Saddam Hussein.

"The U.S. is less of a safe haven today than it was five years ago in terms of value and return to investments," he said.

Europe could spend 0.5 percent of gross domestic product (GDP) on the rebuilding phase in Iraq, while the United States could spend 0.8 percent of GDP, he said.

Australia's central bank has left rates at 4.75 percent since June, aborting a brief tightening cycle to watch global economic developments. McKibbin joined the board in August 2001.

UNCONCERNED

"Since I've been there...what's happening in the world has been one of the most important sets of issues facing Australia," the economist said.

"Uncertainty matters a lot at this stage, not just the war but also the impacts of terrorism and a lot of new shocks that have come along. We're only just learning about how they might impact on our economy and on the world economy," he said.

McKibbin said he was "not concerned at all" about Australia's trade deficit, which blew out to a record A$3 billion ($1.8 billion) in December on large aircraft imports, as it was a result of Australia's relatively high growth rates.

"We're financing investment, we're not financing consumption in excess of our income," he said.

Elsewhere in the region, substantial current account surpluses meant most Asian currencies should appreciate against the U.S. dollar, euro and yen, while the yen itself needed to fall as much as 25 percent versus the U.S. dollar to help kick start that economy, he said.