The economic costs of the (still potential) war are already being felt, most noticeably in the stock market where UK shares are suffering more than their Continental counterparts.

This has got nothing to do with the UK's stance as one of the few European supporters of war with Iraq, but is partly the result of the fact that Britain has one of the deepest and most liquid markets in Europe.

Investors are selling UK stocks simply because they can. But there are other reasons.

It doesn't help that the British market is full of banks that are widely thought likely to be hit by an impending property collapse, one that will be made worse, it is argued, by slower global growth, perhaps even a new recession.

In addition, there are plenty of UK oil companies whose profits will be hit in the short term by disrupted oil supplies during the war and collapsing oil prices, once the war is successfully concluded.

The fact that global growth is already showing signs of being damaged by war preparations is merely icing on the cake. In the US last week it was possible almost to sense companies deferring capital spending decisions and consumers putting off purchases of big ticket items.

This is all very bleak stuff and amounts to a lot of glasses being half full. Take the argument about oil companies: by focusing entirely on two exclusively negative possibilities markets are in danger of spiralling into a self-reinforcing spiral of doubt.

First, Saddam manages to interfere with neighbouring country oil production and, second, a collapse in the price of oil is imminent.

Logically, these are mutually inconsistent, so we shouldn't be worried about both. Markets are putting a gloomy spin on two potential outcomes: a very long, messy war and a very quick, "clean" war. Both can't be right.

All of this negative spin arises from the simple fact that the world economy is only just emerging from the boom and bust of the late 1990s and is still rather fragile. A far from robust recovery - but nevertheless a recovery - has been building and, by its very nature, it is one that is extremely vulnerable to shocks.

The worst outcome, of course, is a war that goes badly and is prolonged. From an economic and market perspective another very bad possibility is that we are still here in six months - or longer - wondering what happens next.

A key feature of the point in the business cycle reached by the UK (and US) economy recently is that a much needed re-balancing was about to take place: the consumer is slowing and investment was beginning to show signs of taking up the slack.

Now, we are left with the bleak possibility of a consumer slowdown and nothing to replace it. Some are even suggesting that we are already close to recession on both sides of the Atlantic.

One of the unintended consequences of all of this has been a marked deterioration in relations between the US and Europe. This can have only negative economic ramifications. In the New York Post last Friday, the front page carried a picture of Gerhard Schröder and Jacques Chirac shaking hands underneath a banner headline, "Axis of Weasel".

The editorial hinted darkly at negative "commercial consequences" for "Continental cowardice". On the same day, the Wall Street Journal carried an editorial under the (heavily ironic) caption "Nos Amis, the French". Strong stuff which, if it reflects the thinking of the US administration - we can only hope it doesn't - bodes ill for future relations.

Other US media carried equally forthright words for European politicians. Don't under-estimate the depth of feeling in the US on this issue: it is seriously annoyed with Europe.

For financial markets, and ultimately economies, there is no good news in any of this. A way has to be found to defuse these transatlantic tensions. All of this gloom is tough to counter. But that is exactly what central banks and fiscal authorities are going to have to try to achieve.

The Bank of England appears to have the most room for manoeuvre, with base rates at 4 per cent, compared to 2.75 per cent in the euro zone and 1.25 per cent in the US.

The series of negative shocks being thrown off by the crisis in the Gulf amount to both supply and demand side surprises, something that the text-books tell us should be met with both fiscal and monetary means.

At least the UK has the room, on both fronts, to deliver the right policy response. Whether or not it will work is another matter.

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