Experts look to history for economic lessons as U.S. prepares for Iraq attack

(March 18, 2003) With a U.S.-led attack on Iraq now appearing inevitable, experts grappling with the possible economic impact are looking back to the last major conflict in the Middle East. But some analysts say comparisons to the 1991 Gulf War won’t tell the whole story.

Unique risks exist today that were not present during the Gulf War, says RBC economist Carl Gomez. “Should the war be immediately followed by a renewed sense of uncertainty associated with terror attacks or a prolonged occupation of Iraq, our outlook of a sustained recovery following the post-war bounce in economic activity could be jeopardized,” Gomez said in a recent commentary.

Financial analyst Dan Hallett of Sterling Mutuals adds that the economic environment of 1991 was much different, with higher interest rates, higher inflation and lower stock valuations. “The past is always helpful, but direct comparisons are often not meaningful,” he told Advisor.ca yesterday.

Economic and market conditions suffered after Iraq invaded Kuwait in 1990, but things improved immediately after the outbreak of the Gulf War in January 1991 as uncertainty about the outcome began to fade. The Dow Jones Industrial Average climbed more than 10% in the month following Operation Desert Storm. But the rebound was short-lived, Gomez says, “due to the lingering effects of a downturn that started the previous year.”

The overall picture seems brighter now, Gomez points out, with historically low interest rates and strength in business productivity. “Unlike 1991, the initial acceleration of economic activity following the outbreak of war is expected to be sustained because of a more supportive policy environment and better business fundamentals.

“The U.S. economy should be back on its way toward a stable recovery once geopolitical risks ebb,” he adds.

That’s a view shared by TD chief economist Don Drummond, who says that any negative fallout from a conflict in Iraq is likely to be limited and is unlikely to push the U.S. economy back into recession. “Once the cloud of uncertainty lifts, all the ingredients are in place for economic growth in Canada and the U.S. to rebound,” he said in a commentary.

For advisors, Hallett says the best client strategy is to be candid and set realistic expectations. “Painting too rosy a picture could simply set clients up for further disappointment,” he told Advisor.ca. “Keeping broad diversification and avoiding big bets on a particular war outcome is about all we can do at this point.”

How are you dealing with clients who worry about the Iraq situation? Share your strategies for addressing your clients’ concerns in the “Free For All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca