A short war with Iraq could cost the world one percent of its economic output over the next few years and more than $1 trillion by 2010, Australian researchers said in a report on Thursday.
A long war could more than triple the costs, they said.
The compounding effects of rising oil prices, extra budget spending and economic uncertainty could cut $173 billion from the world economy in 2003 alone, said the researchers, Reserve Bank of Australia board member Warwick McKibbin and Centre for International Economics executive director Andrew Stoeckel.
Basing their projections on two scenarios -- a short war with a year or two of rebuilding or a long war lasting five years with five years of rebuilding -- the researchers said conflict would sideswipe private investment and probably push equity prices even lower.
"The conclusion is that even a short war will have a significant and noticeable impact on the world economy, but on current projections of world growth would not lead to recession," they said.
"Even a short war could cost the world one percent of GDP per year over the next few years."
While the United States was expected to bear the brunt of the war costs, Britain, Australia and several European countries would have to boost budget spending and Japan would probably be a large contributor to the rebuilding phase, the report said.
"Iraq and some other Middle Eastern countries are assumed to spend considerably on defence, represented by an increase in defence spending by OPEC," it added.
Oil prices were projected to initially rise 90 percent above a baseline of $25 per barrel. Under a short-war scenario, the price spike would quickly dissipate and the world oil price would fall below $25 after the war was over, the report said.
It warned that the investors' uncertainty would compound the rise in oil prices, even in a short-war case.
"Altogether, there could be a drop of investment in the United States of over eight percent below baseline in 2003 and 2004. The fall is less for Japan and Europe, given the assumptions for their contribution to a war and rebuilding."
