Many obstacles lie in path of global recovery

The Iraqi regime has been destroyed. Since anxiety about the war has been hanging over the world economy for months, people hope good times will soon be back. They will be disappointed. While the war has gone as well as might have been expected, many obstacles lie in the way of robust and durable global recovery.

What then are these obstacles? The answer was given by Mr Kenneth Rogoff, the International Monetary Fund's chief economist, in presenting the latest World Economic Outlook (WEO) last week. The risks, he noted, "include the continuing unwinding of the equity price bubble, the emerging risk of a housing price bubble in some regions, financial imbalances around the globe, including the present patently unsustainable constellation of current accounts, structural weaknesses in Japan and Europe\, continuing security concerns... , as well as a variety of sundry further risks, including fragilities in emerging markets and Sars". Not for nothing is economics called the dismal science.

The outcome of the war is hugely welcome. Victory has been swift, casualties (on both sides) low and damage to oil facilities minimal. With the fall in oil prices from $34.50 in early March to $25 a barrel this week, a significant drag on the world economy has been removed.

Yet even geopolitical uncertainties remain. The future stability of Iraq and the wider region is uncertain. So, too, are relations between the US and the Islamic world and within the erstwhile western alliance. In their communiqué last weekend, the finance ministers and Central Bank governors of the Group of Seven leading high-income countries went out of their way to "reaffirm our commitment to multilateral co-operation". Such talk is cheap. Action - over the Doha round of trade negotiations or assistance to the world's poorest countries - is expensive and, alas, unforthcoming.

As important, perceptions of insecurity have not abated. Such insecurity acts as a tax on international economic integration. Some protectionists are already using this fear as an excuse to undermine the post-second World War US commitment to liberal trade. Beyond this, there remain, as Mr Rogoff pointed out, downside economic risks. Two need to be stressed.

First, the full impact of the unwinding of the equity market bubble of the 1990s has not yet been felt. The equity market adjustment may itself not be over, particularly in the US, where stocks remain expensive by historical standards. In addition, the success of the US authorities in easing the post-bubble adjustment means it is more likely to be prolonged.

Second, the pattern of demand is extremely unbalanced. The English-speaking G7 members - the US, UK and Canada - are generating far stronger demand than the other four. Thus, the IMF forecasts real growth of total domestic demand in 2003 at 2.6 per cent in the US, 2.7 per cent in the UK and 3.6 per cent in Canada, against 1.1 per cent in the euro zone and 0.6 per cent in Japan.