A variety of reports on the economic impact of a new war in the Middle East have come out in the last six months, many of which assume a short, sharp and decisive conflict. Although the price of oil jumped 133 per cent in three weeks after Iraq invaded Kuwait in 1991 (to US$28 a barrel), the 2003 short-war scenario envisages oil prices rising to US$40-80 a barrel, before falling well below recent US$30-35 levels.

The impact of oil prices on economies can be tricky, involving currency rates, inflation and reliable supply. Whereas a barrel of crude now costs three times as many Japanese yen as it did four years ago, the "real" (inflation adjusted) price in America is just half of what it was 10 years ago. Moreover, the psychological blow to consumer confidence is one of the most difficult factors to measure.

While US$80 oil will (if it comes) have an impact on Hong Kong's economy (we spent HK$22 billion on fuel last year), the larger effect would arise from the shock to consumer and investor sentiment among our major trading partners. The top three -- the rest of China, North-east Asia and the U.S. -- comprise over 70 per cent of our two-way trade.

The good news is that over the past six months these key markets have been doing quite well. China's economy grew its usual 8 per cent since mid-2002, Korea better than 6 per cent, Taiwan 4 per cent, the U.S. 3 per cent and Japan 0.5 per cent, its best performance in 18 months. Without a war, this up-swing would carry us through 2003-05 very well indeed.

Recent headline numbers are backed up by solid growth in consumer spending, but war will hurt consumer sentiment, and may curb imports. While that likelihood cannot be ignored, it should not be ex-aggerated. Over the past decade, any increase in the pace of import growth among these key economies -- even just a fraction of a per cent -- has coincided with faster economic expansion in Hong Kong. Unless there is a real disaster in the offing, the outlook for this year has a solid floor: the economy will not grow less quickly than last year.

A recent report by investment bank Goldman Sachs opines that the destruction of Iraqi oil pumping facilities will reduce growth in the rich countries by 0.2 percentage points, and Asian expansion by 0.6 points. Only oil exporters Indonesia and Malaysia would not suffer from the high petrol price and uncertain supply.

In North-east Asia, Korea, Taiwan and Japan can easily afford to pay more for fuel. Their combined foreign exchange reserves are over US$760 billion, equal to 15 months worth of imports (a very high figure). China (like the U.S.) is a partial producer and partial importer, and so is also likely to feel less shock than most other economies.

Second, the inflationary impact of more expensive crude oil would be minimized. Korea has very low (by their standards) 3-4 per cent inflation, while Japan and Taiwan are just now easing out of deflation. In a nutshell, higher oil prices in 2003 wouldn't hurt nearly as much as they did in the past, and according to the Goldman report, the least vulnerable economies in East Asia are China and Hong Kong.