The impact of the Israel-Hamas war on the global economy

20, Oct - BLOG

In order to understand the most likely scenarios, 3 key questions need to be answered:
Will other countries be drawn into the conflict?
What impact have conflicts in the Middle East had on financial markets and in the past?
Possible scenarios for the development of events.

Assessments of the current situation

"This may be the most dangerous time the world has seen in decades," said Jamie Dimon, CEO of JPMorgan Chase & Co. We can say for sure that any major conflict in the Middle East can provoke the strongest economic turmoil around the globe, because the countries of this region are the largest suppliers of energy. As we know through the Strait of Hormuz alone (the strait at the exit of the Persian Gulf, which is controlled by Iran on one side and the UAE on the other). The price of oil has jumped due to the Hamas-Israel war, but not by much and it can be interpreted that the markets do not expect the conflict to widen now.

Past larger conflicts have always caused serious repercussions. For example, as a result of the so-called doomsday war in 1973, Arab countries embargoed Western countries because of their support for Israel and this triggered years of stagnation and inflation in those countries. Another example is Saddam Hussein's invasion of Kuwait which caused banks in the US to collapse and cause a recession.

The problem is that the key causes of previous conflicts in the Middle East have gone nowhere. These are the following factors:

• Ethnic and religious divisions;
• The ability of some countries to wage proxy wars;
• Interest in conflicts by major oil suppliers who will benefit from higher prices;
• Interest in conflicts by countries with advanced military-industrial complexes to sell weapons to the belligerents. For example, the US supplied weapons to both sides during the Iran-Iraq war;
• Terrorist organisations whose attacks have often provoked or intensified conflicts. For example, al-Qaeda's attacks in Iraq provoked a civil war between Sunnis and Shiites in that country;
• The confrontation between Saudi Arabia and Iran;
• Mass discontent in many countries caused by corruption, inequality and unemployment.

All these problems make it very tempting to distract the population from domestic problems by dragging the country into war. However, after a week and a half, no third party has yet decided to fully intervene in the conflict despite the fact that Israel is weakened according to conventional wisdom.

How might this affect the world economy?

The world economy is still vulnerable in the second half of 2023 due to the post-Kowtowing spike in inflation and Russia's invasion of Ukraine. Experts agree that a second major war in today's world would certainly accelerate inflation. Petrol prices are one of the key factors influencing voter sentiment in the US, so it is not surprising that the US has already sent its fleet to the region and will try to contain the parties and prevent the conflict from widening.

According to Bloomberg forecasts, a possible direct conflict between Israel and Iran could cost the global economy a 1% slowdown and a 1.3% increase in inflation. In such a scenario, oil prices could soar to $150 per barrel or even higher. It should be noted that these forecasts are preliminary, and their estimates are not final. Inflation and oil prices could rise much higher than the figures in the forecast. Interestingly, although the forecasts are almost apocalyptic, the most important world indices rose steadily before and after the Hamas attack on 7 October. Only the German DAX and the French CAC 40 have fluctuated in the last week. Whether this is a consequence of fears of waves of refugees from the Gaza Strip or normal volatility is difficult to say.

In terms of the possible duration of the conflict, the most optimistic estimate is a month. Provided the conflict remains within its current boundaries, it will have little or no impact on the global or even regional economy.

Possible scenarios for the development of the situation

At the end of the second week of the war, we have the following key factors:

• The top IRGC sees the Hamas attack on Israel as preparation for future attacks on Israel;
• Iranian leader Ali Khamenei, during his speech, repeated all the narratives promoted by Iran's top officials.
• The number of small arms clashes between Israeli security forces and Palestinian militants in the West Bank has declined relative to its peak on October 13;
• Iranian Foreign Minister Hosein Amir Abdollahian wrote in X (Twitter) on Oct. 16 that the expansion of the Hamas-Israel war to "other fronts" is becoming "inevitable."

In general, analysts agree that the greatest likelihood of a resolution was in the early hours of the conflict and declined over time. At the same time, Iranian leaders have not stopped threatening Israel, but so far these threats have not gone beyond statements and look like attempts to intimidate Israel, rather than words that are backed up by a real willingness to participate in the conflict.

Itamar Yaar, one of Israel's top strategists who oversaw the 2005 Gaza withdrawal, says Israeli operations in Gaza will be mixed. There will be the seizure of some territory, and there will also be buffer zones between areas inside Gaza. We should also expect a large number of raids based on interrogations of terrorists. The main purpose of these raids is to try to find and rescue hostages, as well as to eliminate large groups of terrorists. Itamar Yaar is also confident that the ground operation will be accompanied by a large number of Palestinian deaths.

There is no doubt that the number of civilians will "correlate" with the reaction of primarily neighboring Arab states, and to a lesser extent the world community, because everyone will see the pictures and videos of the victims and react accordingly. Governments, regardless of their interests and priorities, will have to follow public opinion to maintain their popularity.

Conclusions

Israeli and world experts agree that after the failure of the Israeli intelligence services and their subsequent discrediting, it is important for Israel to restore its prestige and image as a strong state in order to deter potential rivals. Some experts even say that Israel, contrary to tradition, should forget about possible losses of its army and not worry about the lives of hostages.