The ongoing Israel-Hamas conflict has economists ringing alarm bells. An escalation of the war could pose significant threats to the global economy. Key concerns are:
- Rising energy prices: The Middle East is a pivotal supplier of energy.
- Disruption of trade routes: The region includes major shipping routes essential for global trade.
Diplomatic efforts have surged from international powers, seeking to contain the repercussions of the Oct. 7 attack on Israeli civilians by the Palestinian militant group, Hamas.
Israel’s counteraction through the bombardment of Gaza poses a risk of this conflict spilling over to the broader Middle East region. Israeli President Isaac Herzog has stressed Israel’s reluctance for a war with the Lebanese militant group Hezbollah. However, recent tensions, including fire exchanges in the north, could push Lebanon to “pay the price” if they escalate into a full-scale altercation.
The Oil Implication
Pat Thaker, an executive at the Economist Intelligence Unit, really pointed out how key the Middle East is in the global economy. If oil prices go up, it could start a chain reaction that affects the whole world economy, based on how broad the conflict area is. Thaker stated that the current oil market is under strain, following Saudi-driven OPEC+ production cuts. Additionally, existing economic uncertainties have been amplified by ongoing situations like the war in Ukraine and the monetary policies of central banks.
Recent market data has revealed significant fluctuations in oil prices:
- Brent crude futures approached $89 per barrel.
- West Texas Intermediate futures were close to $84 per barrel.
Thaker also raised concerns about a potential scenario where markets face Brent prices over $100 per barrel for an extended period. Such an event could lead to:
- Elevated global inflation.
- Reduced economic growth.
- Probable recessionary conditions.
Risks to Production and Trade
A research note from J. Safra Sarasin stated that Iran’s oil production could be jeopardized if the conflict escalates, especially with a renewed imposition of U.S. sanctions. This could potentially subtract up to 1 million barrels a day from global output.
Wolf von Rotberg, an Equity Strategist at J. Safra Sarasin, mentioned that oil prices could surge similarly to the aftermath of the 2022 Ukraine invasion. For reference, oil prices had jumped 30% within two weeks post the Ukraine invasion.
Highlighting the importance, Thaker stressed on the crucial significance of the Middle East’s trade lanes:
- The Suez Canal, the Red Sea, the Persian Gulf, and the Strait of Hormuz are some of the most packed shipping routes globally.
- Any disruptions in these routes could negatively impact approximately 15% of international trade, 45% of crude oil, 9% of processed oil, and around 8% of LNG tankers.
Israel’s Economic Pivot
Israel, which boasts a tech-centric economy attracting foreign investments, has had to rapidly adapt to the shifting dynamics of the conflict. Since the Oct. 7 attack:
- The Israeli currency, the shekel, has taken a hit, prompting the central bank to intervene.
- Credit rating agencies, Fitch and Moody’s are reconsidering Israel’s bond ratings.
- The Bank of Israel has revised its economic growth forecast for the year.
It is crucial to note that prior to the conflict, Israel was grappling with economic issues exacerbated by mass protests against Prime Minister Benjamin Netanyahu’s policies. The recent attack by Hamas has compounded these issues.
Historical Economic Impact
Bank of Israel’s governor, Amir Yaron, points to history to gauge the potential economic consequences of the ongoing conflict. Past conflicts have seen:
- Declines in sectors such as construction, agriculture, and tourism.
- Disruption in business operations due to military call-ups. Analysts at Moody’s and Fitch have expressed concerns about the current conflict’s intensity and the potential for larger-scale ramifications if other players, like Hezbollah or Iran, become involved.
In conclusion, while the immediate focus remains on achieving a diplomatic resolution, the economic implications of the Israel-Hamas conflict extend beyond the region, affecting global trade, energy prices, and economic stability.