The vastly different jobs reports for the U.S. and Canada highlight the different conditions prevailing in the economies, but the geopolitical situation is still the dominant event, according to BMO Nesbitt Burns chief economist Dr. Sherry Cooper.

“President Bush made it very clear last night that he will settle for nothing short of regime change and the complete disarmament of Iraq. This neuters the importance of the Blix presentation at 10 am this morning,” says Cooper.

Cooper notes that Bush appears ready to take military action as soon as next week, but is bowing to the request of UK prime minister Tony Blair to provide a short period for Saddam Hussein to reconsider and step down. “The President said last night he would accept exile for Mr. Hussein and his senior team as long as Iraq were to then fully disarm. The period would reportedly be 72 hours to 7-days maximum. Mr. Bush also said he would give the weapons inspectors, media, human shields and others sufficient warning to exit Iraq before the bombing starts. The world, therefore, is poised for a potential war on or before April 1,” Cooper concludes.

“In this tense environment, economic activity undoubtedly suffers. A peaceful resolution — a Saddam exit — would be the best-case scenario for the markets and the economy. But even a short war, with limited casualties, would trigger a strong relief rally and retrenchment of energy prices,” she says.

Still, oil prices have surged taking gasoline, heating oil and natural gas prices with them. And, similar surges in the past have always led to recession, Cooper says. “The already-shaky U.S. economy is quite vulnerable. But if the U.S. were successful in engineering regime change in the next month or so, another recession would likely be forestalled. In the meantime, Canadian exports to the U.S. will continue to be the soft spot in the economy. Underlying momentum, however, continues positive as the economy operates at full capacity. The Bank of Canada will continue to reduce monetary stimulation for the remainder of this year,” says Cooper.

“The Federal Reserve is far more likely to ease than to tighten for the remainder of this year. The gap between Canadian job growth and U.S. job loss has never been greater. And, for now, financial markets will be hostage to the Middle East turbulence,” Cooper says.

http://www.bmonb.com/Economics/bottomline/common/line_b.asp?issue=20030307