By: Jeff Haham
Tensions in the Middle East are not a novel topic. The regional conflict has been prevalent throughout international politics, academic literature, and news coverage for the greater part of the past century. Intraregional relationships were exacerbated succeeding Hamas’ October 7th barbaric massacre of over 1,400 Israelis, the largest terrorist attack on the people of Israel in history, and the subsequent retaliation by Israel’s government.
Hamas was officially designated a foreign terrorist organization by the U.S. State Department in October of 1997, and the Iran-backed militant group has controlled the Gaza region since 2007, following the takeover from rival Palestinian faction Fatah.
Although incomparable to the ongoing effects of human tragedy, the conflict has significantly impacted the economic sector of the region. The Israeli economy has proven itself remarkably resilient to periods of war, growing at an annual rate of 4.2% since the global financial crisis of 2008, and its gross domestic product (GDP) notably surpassed $500 billion last year. Since the October attack, the nation’s economic position has taken a significant hit resulting from the impact of military mobilization on labor supply, reduced tourism, and the impact of increased security concerns on public spending needs, investment, and capital flow. The shekel has depreciated by five percent in nominal effective terms, prompting the Bank of Israel to sell upwards of $30 billion in foreign exchange currency reserves. The program aims to moderate the volatility of the shekel’s exchange rate and uphold market stability.
Comparatively, wartime output coupled with Israeli retaliation has decimated the Palestinian economic position in Gaza. Current United Nations reports indicate the nation’s GDP has already fallen by 4.2% in 2023, and projections predict a possible range reaching as high as 12%, depending on the duration of the war. The ever-worsening conditions are felt at ground-level as the poverty rate shot up to 20%, with speculative projections reaching as high as 45%, also dependent on the duration of the war.
As the battle wages on, concerns begin to surface about impending disruption to the global economy extending far beyond the territorial boundaries being fought over. The prospect of the involvement of additional countries with economic stake in the region adds a notable layer of gravity and complexity, creating various scenarios that could have a profound impact on the world economy.
War is no stranger to the Middle East for a multitude of reasons, a discussion perhaps better suited for an analysis under the Collier-Hoeffler model. However, resulting global economic implications typically stem from the region’s key contributions in the energy and logistic sectors, mainly those relating to oil.
Immediate effects on the global markets were reported by Goldman Sachs Europe Economics Analyst Katya Vashkinskaya, highlighting that “since the current conflict broke out, commodities markets have seen increased volatility, with Brent crude oil and European natural gas prices up by around 9% and 34% at the peak respectively,” emphasizing that “a persistent 10% oil price increase usually reduces Euro area real GDP by about 0.2% after one year and boosts consumer prices by almost 0.3pp over this time.” The conflict’s effect on energy markets has spurred policy responses across Europe, including the Bank of England noting potential risks to efforts on reining in inflation.
These effects face greater implications in the event that Hamas obtains further support through the direct involvement of its backing nation Iran, which continues to intensify threats towards Israel. The extent of international involvement will determine the extent of consequences felt by the global market.
Earlier this year, the Biden Administration unfroze nearly $6 billion Iranian assets in exchange for five American hostages being released. Tehran’s recent increase in oil output by 700,000 barrels per day, now faces the threat of disruption under U.S. pressure surrounding the current Middle Eastern conflict. Bloomberg estimates this potential disruption, barring any escalation, could lead to a $3 to $4 boost in oil prices. Although the increase is unfavorable, the effects on the global market are relatively minimal should the conflict be contained within the region.
Iran’s involvement may also hinge on the escalation of conflicts between Israel and Hizballah – an Iran-backed political party and militia in Lebanon designated as a terrorist organization by the Department of State in 1997 – which has already fired rockets at Israeli forces on the border. Economic projections may be more definite in this scenario as reference to the Israel-Hezbollah war of 2006 shows crude increasing by five dollars per barrel. Bloomberg notes that “on top of the shock from the confined-war scenario, an equivalent move today would send the price up 10% to about $94.” Factoring in a risk-off move in financial markets based on activity during the Arab Spring, the effect would impact global growth by a 0.3 percentage-point drag — about $300 billion of lost output — that would slow the pace to 2.4, the lowest in three decades, and holding global inflation near 6%, furthering policy risks to central banks as mentioned. Involvement of Iranian allies such as Lebanon and Syria suggest a substantial hit on the global energy market as the conflict spreads beyond its current borders.
Ultimately, there is the unfortunate scenario in which Iran and the United States become directly engaged with one another. The resulting oil shock would trigger global stagflation, or rising inflation and lower growth, crashing stock markets, volatility in bond yields, and a rush into safe-haven assets like gold. Bloomberg estimates the spike to reach as high as $150 per barrel in this instance. The effect on the U.S. economy, a positive net exporter of energy since 2019, would likely require a tax on domestic energy producers’ windfall profits to pay for subsidies to limit the negative impact on consumers. China and Europe, who are not positive net exporters, would be hit significantly harder.
It should also be noted that the Straight of Hormuz, located between the Gulf of Oman and the Persian Gulf, includes the territorial waters of Iran. The straight accounts for one-fifth of the volume of the world’s total oil consumption, roughly 20.5 million barrels per day. Should Iran close off the straight, as was hinted by Iranian lawmaker Hassan Norouzi to be contingent on America’s direct aid to Israel, the impact on global growth would be catastrophic. Bloomberg predictions reach a global growth decrease of as much as 1.7%, a number they contend reaching the characterization of a global recession.
In conclusion, the economic repercussions of the ongoing Middle Eastern conflict extend globally, affecting oil prices, inflation, and economic growth. The potential involvement of Iran and its allies adds complexity, with varying extents pointing to significant economic challenges for the region and beyond. The world must not disregard this conflict as a mere intraregional battle over boundaries but must remain vigilant to the drastic global implications pending further escalation.
