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Analysts: World Economic Recovery May Slow Due to Mideast, Terrorism - 2002-04-25

A new United Nations report says the world economy is recovering from last year's recession. But economists warn political developments in the Middle East and Afghanistan could slow things down a bit.

Economists who contributed to the U.N. study agree that world economic growth, though uneven, is being pulled overall by recovery in the U.S. economy. Experts predict modest growth globally this year, about 1.8 percent, with prospects improving in 2003.

However, they also agree that the current political climate, with turmoil in Afghanistan and the Middle East, could add an element of economic uncertainty to the picture.

U.S. economist Lawrence Klein, the 1980 Nobel Laureate in economics, says increased defense spending in the United States in its war against terrorism has undoubtedly helped the U.S. economy pull out of recession. But he says a prolonged crisis in Afghanistan would not likely be beneficial for sustained robust growth.

"When countries have significant increases in the military spending, it is a stimulus, like other spending, especially in the short-run. But it is not creating productive capital for the longer-run," he said.

Meanwhile, economists also caution a U.S. attack on Iraq, which the Bush administration has not ruled out in its efforts to root out support for terrorism, could have a destabilizing effect on global recovery.

Peter Pauly is a professor at the University of Toronto Business School. "We had a discussion in our world outlook yesterday, and there was an assessment at the time that that would probably potentially put about six to eight million barrels a day of oil supply to the world economy at risk," he said. "And there is a substantial potential for a significant price rise as a result of that in the very short run."

In the United States, political uncertainty can impact consumer spending, which is the linchpin of U.S. economic growth. Experts say a spike in prices at the gasoline pump tends to shake confidence.