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Events in Middle East Could Influence US Economy

Economists from the University of Chicago say events in the Middle East could strongly influence the U.S. economy during the next year. They say the economy should continue to grow, unless there is a prolonged war with Iraq.

Low interest rates, slowly declining unemployment and a continued stock market rebound should help the U.S. economy grow by about four-percent in 2003. That's according to economist Joel Stern of New York-based financial policy advisors Stern Stewart & Company. But, he says, the economic picture could darken depending on whether the United States goes to war against Iraq, and how long the war lasts. "If there is a prolonged war in the Middle East, if it is not over almost immediately, then we have problems," says Mr. Stern. "People's expectations will be changed, they will build up short-term cash balances, as they did after September 11 [2001], and we will have a problem on our hands."

The panel making its annual economic forecast in Chicago says it expects a U.S. led war against Iraq early in the New Year. Panelists say if the war is a short one, effects on the economy will be minimal. But, business professor and international risk expert Marvin Zonis of the University of Chicago's Graduate School of Business says a war of any length with Iraq could have other effects. "What I think that will do, among other things, is contribute to a massive new al-Qaida recruiting campaign, supercharge hatred in the Arab world against the United States and Israel, spike oil prices at least above $40." Mr. Zonis says he also expects terrorists to attempt another attack within U.S. borders next year.

The United States' trade deficit is a concern of University of Chicago international economics professor Robert Aliber. He says the current deficit of $480 billion is not sustainable in the long run. But, he says economic problems in Japan, Germany and many Latin American countries means they will continue sending inexpensive goods to U.S. markets. "Each of these countries wants a large trade surplus. They want to maintain their large trade surplus," says Mr. Aliber. "That means it is going to be hard to reduce the U.S. trade deficit."

Mr. Aliber says U.S. foreign indebtedness now equals roughly 12-percent of the U.S. gross domestic product. He says reducing it to about eight percent would help the country's economy grow in a more sustained fashion.

A forecast released late last month by economists at the University of Michigan also offered cautious optimism. They predicted the U.S. economy would grow by 2.5 to 4 percent, unless the country became involved in a protracted war with Iraq.