Israel-Gaza Conflict Raises Concerns over Global Economic Impact
The ongoing conflict between Israel and Gaza has the potential to escalate into a broader regional conflict, with significant implications for global economic growth. Experts warn that if the conflict extends to include Iran’s proxy armed groups, such as Hezbollah, it could lead to increased oil prices, concerns about oil supply, and the potential for a global economic downturn.
The market reaction has been relatively modest so far, but there is a possibility that this could change. Hamza Meddeb, director of the political economy programme at the Malcolm H. Kerr Carnegie Middle East Center in Beirut, emphasized the potential impact of an escalation, stating, “Such an escalation could lead to increased oil prices, concerns about oil supply, and the potential for a global economic downturn.”
The involvement of Iran and a potential U.S. response that includes scaling up sanctions on Iranian oil is a key concern. Brent Belote, founder and CIO of hedge fund Cayler Capital, highlighted the immediate impact of a crackdown on Iranian oil exports, stating, “A crackdown on Iranian oil exports could immediately remove somewhere from 1-2 million barrels per day off the market almost instantly.” He also noted that if the United States were to send troops into the Middle East, oil prices could jump by $20 or more.
The potential for disruption to oil tanker routes in the Mediterranean, Black Sea, and around Turkey is another factor to consider. Nadia Martin Wiggen, director at commodity investor Svelland Capital, explained that a regional conflict could disrupt these routes, further impacting global oil supply.
Inflation is another concern. While there has been a recent easing of inflation and global rate hikes are nearing an end, a spike in oil prices could halt the downward movement of inflation. Alessia Berardi, head of emerging markets macro and strategy research at Amundi, warned that higher commodity prices resulting from Iran’s involvement could trigger a less disinflationary outlook.
The conflict has also had an impact on currency, bond, and stock markets. Israel’s currency, bonds, and stocks have been particularly affected, as have those in Egypt, Jordan, and Iraq. While some emerging markets have largely shrugged off tensions for now, Aegon Asset Management’s Jeff Grills cautioned that a regional escalation could lead to a 20% jump in oil prices, which would further hurt oil-importing countries already facing economic challenges.
The potential disruption to infrastructure is also a risk. Egypt, for example, is a crucial location for intercontinental cables, with at least 17% of global internet traffic crossing through the country. Deutsche Bank highlighted the vulnerability of this infrastructure, stating, “At least 17% of global internet traffic crosses this route.”
In terms of sector performance, airline stocks have suffered since the Hamas attacks in Israel, while aerospace and defense shares have seen gains. MSCI’s airline stock index is down about 5% since the attacks, while aerospace and defense shares are almost 6% higher.
Overall, while the market reaction to the Israel-Gaza conflict has been relatively subdued thus far, experts caution that an escalation could have far-reaching consequences for global economic growth, oil prices, and inflation. The potential involvement of Iran and the disruption to infrastructure and markets in the region are among the key factors to watch.
More detail via Investing.com here… ( Image via Investing.com )