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Markets count the cost of war
LONDON, England (Reuters) -- Markets will ponder next week the potential economic consequences of the U.S.-led war on Iraq even if fighting is not over yet, with U.S. consumer sentiment and retail sales data offering clues on the war's early impact. Already this week a host of manufacturing and services surveys showed European economies suffering because of the war, while U.S. consumer spirits were sinking to near-decade lows as U.S. troops fought in the Gulf. In addition to the war's immediate effect on economic performance, markets are also concerned about the massive long-term costs of rebuilding Iraq. Iraq's reconstruction bill will be high on the market agenda ahead of next weekend's meeting in Washington of finance chiefs from key industrial nations, with the United States expected to seek help from the Group of Seven (G7) in paying the costs. So far, Washington has born the brunt of the cost of war, launched at its calling and with only a handful of allies. But markets fret that U.S. taxpayers will also fund reconstruction of Iraq with several G7 members angered by the war they oppose. "Continued developments in Iraq will be the main factor driving markets," said Philip Shaw, chief economist at Investec. "In the United States, there is very little until Friday when we get both retail sales data and the preliminary March consumer sentiment survey from the University of Michigan." Britain will also be high on the agenda with Chancellor of the Excheckr Gordon Brown due to unveil the 2003/04 government budget on Wednesday and the Bank of England's Monetary Policy Committee (MPC) deciding on interest rates on Thursday. REAL ECONOMY SUFFERS U.S. consumers were long seen as the antidote to slumping business sentiment, but recent data suggests consumption should not necessarily be counted on to support U.S. economic growth as war jitters hit spending. Markets will watch Friday's release by the University of Michigan of its preliminary April index of consumer sentiment to see whether the poor showing from March is repeated. U.S. consumer sentiment hit the lowest level in almost a decade in March but improved from its mid-month level on early euphoria that the Iraq war would be quick and victorious. Since then, the U.S.-led offensive in Iraq has dragged on beyond the optimistic forecasts of a one-week fight that many in the markets had expected. But in recent days, as the war went into its third week, dollar bulls have cheered as U.S. troops closed in on Baghdad, positioning for a battle that could prove decisive in the war. "What seems to be happening is that U.S. business sentiment is faltering and consumer sentiment is tailing off," said Stephen Lewis, chief economist at Monument Securities in London. U.S. March retail sales data are expected to show a 0.2 percent uptick month-on-month from February's 1.6-percent fall. International cooperation?Meanwhile, talks are seen tense during the G7 meeting in Washington after U.S. Treasury Secretary John Snow said this week he expected the finance chiefs to spend considerable time discussing how the cost of rebuilding Iraq may be shared. Markets fear the costs will further bloat the U.S. current account and budget deficits, weighing on the world's largest economy whose performance is key to global exports. But deep rifts between the U.S. and some of its G7 partners, mainly Germany and France, over the Iraq war could damage their willingness to cooperate on economic issues, markets fear. "It is not clear what the impact of estrangement between the U.S. and some its allies will have on the financial sphere. The last G7 meeting did not achieve a great deal," said Lewis. Snow is also due to speak at the Bond Market Association annual members' meeting in New York on Thursday. Budgets, rate decisions aheadThe UK budget will grab the headlines on Wednesday with markets eager to see whether England plans to increase borrowing to fund the war on Iraq despite Brown's pledges to maintain his spending commitments. Some analysts believe the budget announcement will stop the BoE from cutting interest rates on Thursday, since such a move could be construed as a judgment on the budget. But they warn chances of a rate cut are on the rise as data continues to paint a gloomy picture of economic performance. The BoE's monetary council left borrowing costs steady at a 48-year low last month as some MPC members preferred to have the budget in their hands before making a decision. However, Britain's manufacturing data, due on Monday, is expected to show a contraction of 1.1 percent year-on-year after January's 0.3 percent fall. Industrial production in Germany, stuck in stagnation, is seen falling 0.2 percent year-on-year in February, unchanged from January. Data is due on Tuesday. The Bank of Japan, due to announce any decisions after a two-day meeting on Tuesday, is also not seen making any changes.
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