Global geopolitical tensions often have a significant impact on how people perceive economic growth. Research indicates that concerns about such issues can make individuals and businesses more cautious in their spending and investment, potentially leading to economic recessions.
The recent escalation of the Israel-Palestine conflict is no exception. Investors worldwide are anxious about the consequences of this war, especially given the already grim outlook for global economic growth.
Hamas’s attack on southern Israel on October 7 is the latest episode in a long-standing cycle of violence in the region, with no apparent end in sight. While the underlying causes of these events are complex, it’s easier to understand the potential short-term and long-term economic consequences of the conflict.
The Russia-Ukraine conflict has shown us the importance of being mindful of the complex interconnections that shape the global economic and geopolitical landscape.
How Conflict can Affect global Ecconomy
Internal and interstate conflicts often exert a significant influence on stock market indices, exchange rates, and commodity prices. At times, these conflicts can even drive prices higher as hostilities approach. However, assessing the longer-term economic impact is often more complex, as it’s challenging to predict the enduring effects on investor behavior.
Historically, conflicts in the Middle East have frequently led to spikes in oil prices. Notable examples include the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War that began in 1980, and the first Persian Gulf War in 1990-91. Given that the Middle East accounts for nearly a third of global oil supply, any instability in the region can trigger market uncertainty due to concerns about disruptions in global oil supply.
This uncertainty is reflected in the risk premium in oil markets. It represents the price paid for oil traded in the futures markets compared to the real-time oil price. It encompasses the expected profits of speculators buying and selling oil during conflicts and the hedging needs of businesses involved in oil production and consumption, considering potential supply and demand fluctuations.
The impact of the recent Israel-Hamas conflict on global financial markets will depend on the involvement of major regional powers. If the conflict remains limited to Israel and Hamas, the impact may be restricted, primarily affecting countries with direct trade exposure to Israel or Palestine.
However, if the conflict extends to major oil-producing nations in the region, like Iran, it could have severe consequences for the global economy. Energy costs for businesses and households may surge if the oil supply is disrupted.
Higher energy prices could impede the efforts of central banks to control inflation in most advanced and emerging economies. If this leads to a “higher for longer” monetary policy with elevated interest rates, it could increase the costs of borrowing and refinancing for governments, companies, and individuals.
Historical examples can offer insights into how the global economy might be affected under different scenarios. For instance, the 50-day war between Israel and Hamas in 2014, which resulted in the deaths of 2,200 people, mostly civilians, had no significant impact on the global economy or financial markets. However, when Israel and Hezbollah clashed in Lebanon in 2006, global oil prices surged due to fears of a broader Middle East conflict.
The Narrative this Time
Internal and interstate conflicts often exert a significant influence on stock market indices, exchange rates, and commodity prices. At times, these conflicts can even drive prices higher as hostilities approach. However, assessing the longer-term economic impact is often more complex, as it’s challenging to predict the enduring effects on investor behavior.
Historically, conflicts in the Middle East have frequently led to spikes in oil prices. Notable examples include the OPEC oil embargo of 1973-1974, the Iranian revolution of 1978-1979, the Iran-Iraq War that began in 1980, and the first Persian Gulf War in 1990-91. Given that the Middle East accounts for nearly a third of global oil supply, any instability in the region can trigger market uncertainty due to concerns about disruptions in global oil supply.
This uncertainty is reflected in the risk premium in oil markets. It represents the price paid for oil traded in the futures markets compared to the real-time oil price. It encompasses the expected profits of speculators buying and selling oil during conflicts and the hedging needs of businesses involved in oil production and consumption, considering potential supply and demand fluctuations.
The impact of the recent Israel-Hamas conflict on global financial markets will depend on the involvement of major regional powers. If the conflict remains limited to Israel and Hamas, the impact may be restricted, primarily affecting countries with direct trade exposure to Israel or Palestine.
However, if the conflict extends to major oil-producing nations in the region, like Iran, it could have severe consequences for the global economy. Energy costs for businesses and households may surge if the oil supply is disrupted.
Higher energy prices could impede the efforts of central banks to control inflation in most advanced and emerging economies. If this leads to a “higher for longer” monetary policy with elevated interest rates, it could increase the costs of borrowing and refinancing for governments, companies, and individuals.
Historical examples can offer insights into how the global economy might be affected under different scenarios. For instance, the 50-day war between Israel and Hamas in 2014, which resulted in the deaths of 2,200 people, mostly civilians, had no significant impact on the global economy or financial markets. However, when Israel and Hezbollah clashed in Lebanon in 2006, global oil prices surged due to fears of a broader Middle East conflict.
Given these conditions, investors are preparing for increased financial instability in various markets, including stocks, government bonds, and commodities. During times of significant economic uncertainty, assets like gold, often considered safe havens, are sought after for protection. The price of gold has risen in response to the recent escalation of the Israel-Palestine conflict.
Financial markets will continue to closely watch the Israel-Hamas conflict for any signs of further escalation. Any developments that drive up oil prices will rekindle concerns about rising inflation.
Regrettably, this is occurring at a time when many countries had just begun to observe a slowdown in inflation after two years of consistently high consumer prices.
Source: The Conversation