Wider war in ME could tip the world economy into recession
Like Middle East wars of the past, the conflict between Israel and Hamas that broke out this past week has the potential to disrupt the world economy and even tip it into recession if more countries are drawn in.
That risk is real, as Israel’s army prepares to invade Gaza in response to an attack by the militant group. The death toll from the Hamas assault and the ongoing Israeli air strikes on Gaza is already in the thousands. There’s concern that militias in Lebanon and Syria that support Hamas will join the fighting.
A sharper escalation could bring Israel into direct conflict with Iran, a supplier of arms and money to Hamas, which the US and the European Union have designated a terrorist group. In that scenario, Bloomberg Economics estimates oil prices could soar to $150 a barrel and global growth drop to 1.7% a recession that takes about $1 trillion off world output.
Of course, secondary effects like these aren’t top of mind after the past week’s human tragedy. A large majority of the dead on both sides are civilians. Dozens of Israeli hostages have been taken to Gaza. Missiles and a looming ground attack threaten the lives of Palestinians trapped in the enclave with no escape route. The devastation is raising emotional temperatures, and makes military escalation more likely.
Conflict in the Middle East can send tremors through the world because the region is a crucial supplier of energy and a key shipping passageway.
The Arab-Israeli war of 1973, which led to an oil embargo and years of stagflation in industrial economies, is the clearest example. Other conflicts had a more limited impact, even when the human toll was high.
Today’s world economy looks vulnerable. It’s still recovering from a bout of inflation exacerbated by Russia’s invasion of Ukraine last year. Another war in an energy-producing region could rekindle inflation. Broader consequences could extend from renewed unrest in the Arab world, to next year’s presidential election in the US, where gasoline prices are key to voter sentiment.
In an interview
at the International
Monetary Fund’s annual meetings in Morocco, Treasury Secretary Janet Yellen said she’s not seeing signs of “major economic ripple effects” at this stage. “It’s critically important that the conflict not spread,” Yellen said.
Tehran has increased its oil output by as much 700,000 barrels per day this year, as prisoner exchanges and unfreezing of assets signaled a thaw in relations with the US. If those barrels disappear under US pressure, Bloomberg Economics estimates a $3 to $4 boost to oil prices.
The impact on the global economy under this scenario would be minimal, especially if Saudi Arabia and the UAE offset lost Iranian barrels using their spare capacity.