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By Farah Nayeri
Washington, Sept. 29 (Bloomberg) -- The world economy is suffering because of the prospect of a U.S.-led attack on Iraq, according to finance ministers and central bankers from the Group of Seven industrialized nations.
European, Canadian and Japanese central bankers and the finance ministers of Germany and France, meeting this weekend to discuss prospects for the global economy, said anticipation of a Gulf conflict is raising oil prices, pummeling stock markets and scaring households and businesses away from spending.
``Uncertainty causes people to sit on their hands, whether they be CEOs of corporations or whether they be consumers, and to delay decisions,'' said Bank of Canada Governor David Dodge, referring to the situation in Iraq.
Talk of war against Iraqi leader Saddam Hussein unless he disposes of chemical, biological and nuclear weapons has pushed up oil prices more than 50 percent this year. The Standard & Poor's 500 Index has dropped 28 percent, dragging other world stock indexes down.
``If it's not a quick, short war, and oil production capacity got knocked out elsewhere in the Gulf, then we'd be in a real pickle,'' said Kenneth Courtis, vice chairman for Asia at Goldman Sachs Group Inc. ``That would tip the world economy into recession.''
`Risks Remain'
Already, the world's three biggest economies are shrinking or barely growing. Japan will contract for a second year in a row in 2002, according to International Monetary Fund forecasts, while the 12 countries sharing the euro will grow 0.9 percent. The U.S. is poised for a 2.2 percent expansion.
The G-7 ministers, who met Friday in Washington, made no mention of a possible war in their page-long statement. They said world growth was steady, although slowing. ``We recognize that risks remain,'' they said.
Iraq, which U.S. President George W. Bush defined in January as being part of an ``axis of evil'' for developing weapons of mass destruction and sponsoring terrorism, is being pressed to disarm or face attack. The U.S. is lobbying for the United Nations to draft a resolution to that effect, although Bush has made clear the U.S. will go it alone if necessary.
`Iraq About Freedom'
U.S. officials have played down the economic cost, saying it's a war worth waging.
``For me, Iraq is about freedom,'' Treasury Secretary Paul O'Neill said last week. ``I personally don't think freedom has any acceptable price limit.''
Federal Reserve Chairman Alan Greenspan said last week in London that studies showed rising oil prices would not ``produce a significant impact'' on the economy.
Still, he said, ``the last several recessions in the United States have been preceded by an oil price spike.''
In the past three decades, oil prices have more than tripled on four occasions, contributing to a global recession each time: in 1973, when Iran and the Arab world limited output; in 1979, with the Iranian Revolution; in 1990 with Iraq's invasion of Kuwait; and in 1999 when oil producers cut output.
The Organization for Economic Cooperation and Development estimates that a 50 percent rise in oil prices would after a year knock three-tenths of a percentage point off U.S. growth and push inflation up by half a percent.
The impact on Europe is higher: Growth would be knocked back by four-tenths of a percentage point, and inflation would accelerate by six-tenths of a percent, according to the OECD.
Dollar Danger
That's because Europe imports more oil. Net oil imports amount to 1.5 percent of gross domestic product in the euro region, compared with 1 percent for the U.S., according to Credit Suisse First Boston estimates.
Europe is further exposed because the dollar tends to rise during periods of conflict, making dollar-priced oil purchases more expensive. Oil prices tripled from the start of 1999 to the end of 2000. When measured in euros, they quadrupled.
For the European Central Bank, whose main job is to keep inflation at or below 2 percent in 12 European countries, rising oil impedes interest-rate cuts. That's as the region is set to grow 0.9 percent this year, according to IMF estimates.
ECB President Wim Duisenberg told reporters ``the geopolitical situation'' was one of several factors that ``could pose a risk'' to European economies. ``A significant increase in oil prices implies some upward risk to inflation.''
`War Upsets Markets'
Fellow ECB policy maker Antonio Fazio, governor of the Bank of Italy, went further. ``Fear of war is weighing heavily on capital markets,'' he told reporters. ``War upsets markets a great deal, because it creates uncertainty.''
Politicians expressed similar worries.
German Finance Minister Hans Eichel, whose boss, Chancellor Gerhard Schroeder, opposes attacking Iraq, singled out the possibility of war as ``one of the great uncertainties'' and said ``everything must be done to avoid'' damage to the economy.
His remarks came as a survey of 7,000 German companies showed business confidence sinking to an eight-month low in September.
His French counterpart, Francis Mer, warned that war would ``lead to a loss of confidence and a flare-up in oil prices.''
That ``would not be good news for the economy,'' he said. In France, consumer spending fell for the first time in three months in August, as unemployment rose and stocks tumbled.
Japan also expressed concern, without naming Iraq. The impact of rising oil prices on Japanese growth and inflation is less than on the U.S. and Europe, OECD estimates show.
``The recent sharp fall in equity markets, together with high oil prices, have caused some uncertainties,'' Bank of Japan Governor Masaru Hayami said in a speech. ``We need to be vigilant.''
Even oil-producing countries that would benefit from a rise in prices were cheerless about a potential war.
``High prices could lead to a slowing of world growth,'' said Guillermo Ortiz, governor of the central bank of Mexico, which draws 30 percent of its revenue from oil. ``That is much more of a negative.''