How will the Palestinian-Israeli conflict affect the economy?
The American financial agency Bloomberg examined three scenarios in which the conflicts between Israel and Palestine could develop, from the perspective of the markets.
The article examines the effects of three different war scenarios on oil, global growth, inflation and the market: the limited conflict in Gaza, the regional proxy war and the war between Iran and Israel.
While markets view the Iran-Israel conflict as a worst-case scenario, although it is unlikely, it seems almost inevitable that the global economy will enter a recession in a worst-case scenario.
SCENARIO 1: LIMITED CONFLICT WITH GAZA
The kidnapping and murder of three Israelis by Hamas in 2014 was the trigger for the ground attack on Gaza that killed more than 2,000 people. The conflict has not spread beyond the Palestinian territory and its impact on oil prices and the global economy has been limited.
One of the possible directions of the current conflict could be a repetition of this tragic story, with the tightening of US sanctions on Iranian oil.
Tehran has increased its oil production by 700,000 barrels a day this year, as the prisoner swap and asset freeze signaled a detente in relations with the United States. Bloomberg Economics estimates that if these barrels disappear under US pressure, there will be a $3 to $4 increase in oil prices.
The impact of this scenario on the global economy will be minimal if Saudi Arabia and the United Arab Emirates compensate for the losses caused by Iran by using their excess capacity in oil production.
SCENARIO 2: PROXY WAR
Hezbollah, a powerful player in Lebanon, clashed with Israeli forces at the border and announced that it had attacked an Israeli army post with guided missiles. If the conflict spreads to Lebanon and Syria, supported by Iran, it will become a proxy war between Iran and Israel and its economic costs will increase.
A move in this direction will increase the possibility of direct conflict between Israel and Iran and will likely increase oil prices. During the brief but bloody war between Israel and Hezbollah in 2006, crude oil rose by $5 a barrel. An equivalent move today would increase the price by 10 percent to about $94.
If this scenario occurs, rising oil prices will reduce global growth by 0.3 percentage points next year, causing a production loss of approximately $300 billion and reducing the growth rate to 2.4 percent. . It would be the weakest growth in three decades, excluding the 2020 Covid crisis and the 2009 global crisis.
Higher oil prices would add about 0.2 percentage points to overall inflation, keeping inflation around 6 percent, keeping pressure on central bankers to maintain tight monetary policy.
SCENARIO 3: IRAN-ISRAEL WAR
A direct conflict between Iran and Israel is an unlikely but dangerous scenario. This situation could also trigger a global recession. In this scenario, rising oil prices and falling risk assets will deal a significant blow to growth and push inflation up a notch.
With about a fifth of the world’s oil supply coming from the Gulf region, prices will rise rapidly. A repeat of the attack carried out by pro-Iran militants against Aramco facilities in 2019, which disabled almost half of Saudi oil supplies, is not ruled out.
Crude oil prices may not quadruple like they did in 1973. But if Israel and Iran start firing missiles at each other, oil prices could rise, as they did after Iraq invaded Kuwait in 1990. An increase of that magnitude today could take oil to $150 a barrel.
If Iran decides to close the Strait of Hormuz, through which a fifth of the world’s daily oil supply passes, excess production capacity in Saudi Arabia and the United Arab Emirates may not save the day.
According to Bloomberg Economics, if this scenario occurs, $1 trillion could be wiped out of the economy with a 1.7 percent contraction. An oil shock of such magnitude could also derail efforts to control prices around the world and send global inflation soaring to 6.7 percent next year.