By Syed Hussain
The Israel-Palestine war has profound and wide-ranging implications for the global economy that extend far beyond its immediate geographic confines. The persistent state of unrest and bloodthirsty carnage unleashed on the Gaza strip not only weighs heavily on humanitarian concerns but also on the intricate web of international economic relations.
The impact of the conflict has been examined in three distinct ways: a confined conflict, a proxy war involving regional actors like Lebanon and Syria, and a direct military confrontation between Iran and Israel. Each scenario poses a threat of rising oil prices, heightened inflation, and impeded global growth, with the most severe being a direct Iran-Israel war, which could lead to substantial economic downturns worldwide. These developments occur against the backdrop of a vulnerable global economy still reeling from the effects of recent conflicts and inflationary pressures in a post covid climate.
At the core of the economic dimensions tied to the conflict are the energy markets. While Israel and Palestine are not major oil producers, their central location in the geopolitically sensitive Middle East means that any escalation in tensions can have a knock-on effect on regional stability, potentially impacting oil production and transport across the broader area. This in turn can lead to fluctuations in oil prices due to speculative trading and hedging activities by businesses concerned about supply disruptions. Such price swings are especially significant given the critical role of oil in the global economy, as highlighted by historical events such as the oil crises of the 1970s and the dramatic spike in oil prices in 2008, both of which had long-standing ripple effects on the world economic stage.
The stock markets, naturally averse to the uncertainties brought about by geopolitical strife, often react negatively to the signs of escalation within the conflict. Risk aversion tends to set in, prompting a sell-off in equities, particularly within sectors and companies with exposure to the region. Conversely, this climate of uncertainty can boost investments in safe-haven assets like gold which has seen a hike of 9% surging above $2000 dollars per ounce day after the Hama’s attack on Israel, other things like U.S. dollar, and government bonds, which traditionally benefit from risk-off investor sentiment have all seen a surge in investment and interest.
Another significant economic aspect influenced by the conflict is the tourism and aviation industries. The conflict has spelt trouble for the Israeli economy where 4% is dependent on tourism as well as neighbouring tourism sectors in gulf states feeling the after effects of the violence next door. The historical and political unrest in the region has tarnished the industry, deterring tourists and impacting a wide array of businesses from airlines to hotels and the service economy at large. This also has a domino effect on neighbouring countries whose economies are heavily reliant on tourism.
Foreign Direct Investment (FDI) in the region can also be adversely affected as potential investors often rethink channelling capital into areas marred by conflict, wary of the associated risks. Moreover, supply chain disruptions can ensue, posing a challenge to businesses that depend on goods and materials from the conflict zone, thereby increasing costs and causing delays in global trade.
The humanitarian cost of the conflict necessitates considerable foreign aid and international assistance, which can reallocate resources that might otherwise be used for economic development in other regions. Furthermore, international relations and trade agreements may be reassessed based on the stance countries take regarding the conflict, potentially reshaping global trade dynamics.
Israel, known as the "Start-up Nation," is a hub for technological innovation, and the persistent state of conflict can threaten to undermine international partnerships, venture capital investments, and collaborative projects in the tech sector. Lastly, currency markets may experience volatility due to the conflict, affecting the financial strategies and stability of nations closely linked to the Middle East.
The World Bank has raised concerns that oil prices could potentially escalate to over $150 per barrel if the ongoing conflict in the Middle East, particularly between Israel and Hamas, intensifies, mirroring the oil shock experienced in the 1970s. Such a surge would be a response to supply cuts from significant producers like Saudi Arabia in the wake of the already unstable commodity markets due to Russia's invasion of Ukraine. Currently, there's an expectation of a downturn in commodity prices by about 4.1% in the upcoming year, with oil projected to drop to an average of $81 a barrel. However, an exacerbated Middle Eastern conflict could severely disrupt this trend, potentially shrinking global oil supply by 6 to 8 million barrels a day and hiking prices up to $157 a barrel.
Political and economic analysts fear that an intensified conflict that brings Israel into direct engagement with Iran, which provides weapons and funds to Hamas, could trigger a dramatic increase in oil prices up to $150 per barrel. In such an event, Bloomberg Economics predicts that global economic growth could plunge to 1.7%, effectively slicing around $1 trillion from the global economy and potentially pushing it into a recession.
Despite the market's initial lacklustre response to the conflict, with Brent crude prices recently falling to around $87 a barrel, any significant involvement by key crude producers like Iran could have broader implications, particularly if the Middle East's turmoil spills over into the global oil export markets. The region, accounting for about 30% of the world's oil supply, has a less dominant but still significant role compared to its 37% share in the 1970s, suggesting that any disruption could still have considerable global economic repercussions. With the lingering effects of the Ukraine crisis, the threat of rising commodity prices could trigger another inflationary cycle, challenging policymakers and central banks. Beyond economics, a prolonged conflict poses a serious risk to global food security. High oil prices translate into steeper costs for shipping and fertilizers, driving up food prices at a time when nearly a tenth of the global population is already struggling with undernourishment, underscoring the urgent need for stability to prevent a deepening of the global food crisis.
The projected economic outlook is being hit from two sides: a 10% hike in oil prices and an increase in market risk-aversion, similar to the sentiment during the Arab Spring. These elements are anticipated to shave off 0.3 percentage points from the global growth rate for the next year, amounting to a loss of roughly $300 billion in output, which would result in the most tepid growth in three decades, except for the downturns in 2020 due to Covid and in 2009. Furthermore, climbing oil prices are likely to contribute an additional 0.2 percentage points to worldwide inflation, potentially stabilizing it near 6%. This situation forces central banks around the world to persist with tight monetary policies in the face of weakened economic expansion.
As for the central banks' response, the Bank of England, along with the Federal Reserve and European Central Bank, are holding interest rates steady for now but are wary of the approaching winter. They remain vigilant due to potential further hikes in inflation, fuelled by the volatile oil market amidst the ongoing conflict and the risk of escalation. These institutions are cautiously navigating these uncertain times, aware that the energy crisis could exacerbate inflationary pressures during the colder months when energy demand typically spikes.
In conclusion, the economic repercussions of the Israel-Palestine war underscore the interconnected and globalist nature of the modern global economy. The conflict's ability to affect various economic sectors—from energy to finance, technology to tourism—demonstrates the extent to which regional instability can propagate, influencing global economic health and dictating a cautious approach for businesses and governments alike. The world sits nervously watching the massacre unfold on the Gaza strip , time will tell what mounting escalations evolve and the repercussions that arise from them.