War in Iraq has already started denting the global economy, data and reports showed today, stoking fears of even greater damage ahead as the chances of a protracted war seemed to be rising.
The International Monetary Fund warned a long war could undermine the global recovery and disappoint markets which had generally bet on a fast outcome. Even a short war might have longer-lasting economic fallout, it said.
IMF director Mr Gerd Haeusler, delivering a Fund report on economic risks, said the economic damage could be long-lasting even if the war was short.
"What will it mean for the region, whether or not the likelihood of terrorist attacks might diminish or, some say, even increase... are issues which are far more important than the question of whether the war may take a week longer or not," he told a press meeting.
Spreading terrorism could undermine the fragile global recovery and a steep fall in the dollar could also destabilise markets already struggling to recover from the bursting of the asset price bubble, the Fund report said.
The dollar sagged in the weeks leading up to the war, but recovered as soon as fighting started. Stocks veered up at the same time, and oil prices, which had been well over $30 came down to around $25. But these trends have now started reversing.
War has begun to affect some businesses directly, including flight cancellations by airlines around the world. American Airlines, the world's largest carrier, said it would cut international flights by six percent in April, adding to a cut of seven percent on US domestic routes announced previously.
But if oil prices were to pick up more rapidly in coming weeks again, that could put a considerable brake on growth right across many sectors of the major economies.
Oil prices would be the key determinant of how the war could affect the euro zone, ECB chief Economist Mr Otmar Issing said in testimony before the European Parliament this week.
"The pessimistic scenario foresees a strong and protracted increase in oil prices accompanied by a rather severe loss of confidence, giving rise to expectations of subdued demand," Mr Issing said. On the other hand, a short war could lead to a faster recovery with market turbulence diminishing, he said.
While it is a positive fact that oil prices have been relatively tame up to now, monetary authorities have little room to support the global economy with cheaper borrowing costs, as official interest rates are already very low.