LONDON BRIEFING: Oil prices have never been at their current level without a global recession occurring about a year later. The past is rarely a good guide to the future but this sobering fact needs to be confronted by those who think that a post-Iraq world will see business as usual and growth, in particular, resumed, writes Chris Johns.

Two facets of economic life dominate discussions in Britain and they are both related. Oil and house prices will now largely determine where the UK economy goes over the next few years.

In a sense, they provide summary guides to the complex matrix of international and domestic influences on business activity.

The doom-and-gloom merchants see both the property and oil markets as guaranteeing a recession that the Bank of England will be powerless to head off. According to the pessimists, a spontaneous bursting of the housing bubble is under way, prompting a collapse of the UK consumer, and high oil prices have now done sufficient damage to industry that any revival in investment spending - which collapsed last year - is now, at best, a possibility for 2004.

Those of us who think all of this is a bit grim argue that the housing market is rolling over but not collapsing - a bit like the Irish experience of a couple of years ago. We also believe that the importance of oil, while still high, has diminished through time, thanks to conservation and other efficiency measures.

But the confidence of the optimists is being constantly eroded.

One of the key arguments about oil is in terms of its importance relative to the size of the economy. Oil per unit of gross domestic product is how the economists express this idea, essentially trying to describe how much oil is used to make a car, a computer or whatever. And when measured this way, it is clear that we consume far less oil, relatively speaking, than we used to.

As with all statistical exercises, there is a sting in the tail. It takes far less oil to produce a unit of output, but oil consumption per person is now higher than it used to be (partly because more people drive cars but there are lots of other reasons).

I could go on, but the picture should be clear: the economists and statisticians are, as ever, arguing this one both ways. Oil is important but we don't definitively know just how critical it is.

Another argument relates to the correlation of high oil prices and subsequent recession. It could be that the main reason for this is that central banks used to raise interest rates to counteract the higher inflation that would ensue from higher energy prices. It wasn't the oil price, goes this argument, it was the reaction of interest rates.

Tighter monetary policies caused the economic slumps. Now, even the incomprehensible actions of the European Central Bank (ECB) still amount to lower interest rates. So this time around there will be no recession thanks to lower, not higher, interest rates. The Bank of England has plenty of scope to cut rates, more so than the ECB.

The problem with this line of reasoning is that interest rates are falling because economies are weak; weakness that has got little (yet) to do with the oil price. It would be much easier to be optimistic about the effects of higher energy costs if the British economy, along with many others, were in a robust state, sufficient to withstand the shock. In reality, these economies are being kicked when they are down.

Housing, like financial markets, is mostly a game of confidence. Until recently there have been few reasons to expect anything other than a relatively benign slippage in British house prices. But confidence could be shattered by a rise in unemployment if higher oil prices prompt recession.

UK consumers - the mortgage holders - are walking a tightrope; they need interest rates to stay low and they need to keep their jobs. The Bank of England is in direct control of the former but has only the loosest of grips on the latter.

The military and moral arguments about potential conflict in the Gulf are by now very clear. Understandably perhaps, the economic consequences of war have been pushed to the background. But if there is any doubt about the arguments for war, there should be none about its economic significance.

If it's still "the economy, stupid", then governments of all shades of war opinion should be very worried indeed.

Chris Johns is chief strategist at ABN AMRO Securities, London. All opinions expressed are entirely personal.

cjohns@eircom.net