The impact of the Gaza conflict could become severe and long-term

The tragic outbreak of hostilities between Israel and Hamas has shocked the world. So far, the overall reaction of financial markets has been muted. However, the longer-term ramifications, including significant global economic disruption, could be severe. 

Energy is the most immediate concern. The Middle East is far-and-away the world’s most important energy producer. According to the 2023 Statistical Review of World Energy, the region contains 48 per cent of global proved reserves and produced 33 per cent of the world’s oil in 2022. Oil prices have risen by about $5 a barrel since the start of the conflict. 

Oil production has not yet been materially affected. Matters will escalate rapidly if Iran becomes drawn into the conflict and carries out its threat to close the Strait of Hormuz. This is a critical chokepoint. Oil tankers carrying approximately 17 million barrels of oil, or 20% to 30% percent of the world's total consumption, pass each day through the Strait. 

Such a development, as well as the possibility of unrest taking a toll on production in Iraq, would cause a massive oil supply shock with severe implications for energy prices and global economic activity. The World Bank has estimated that, in this worst-case scenario, the global oil supply could shrink by 6 to 8 million barrels per day and oil prices could go up to as much as $150 a barrel. 

High energy prices increase the costs for many companies in the manufacturing and service sectors and stoke higher inflation. This will hit disposable incomes and discretionary spending and negatively impact global growth. The IMF has estimated that each 10% increase in oil prices could depress global growth by 0.5%.

Clearly, Israel, representing one of the most developed economies in the Middle East, will be heavily affected.  The country, which has shown remarkable resilience in the past during previous periods of conflict, has low national debt, a current account surplus and high foreign exchange reserves. If the conflict in Gaza worsens the strength of the economy will increasingly be put to the test as a result of the impact of military mobilisation on labour supply, reduced tourism and increased security expenditure.

Other countries in the region such as Lebanon, Jordan and Egypt all face challenging macroeconomic outlooks. Lebanon is currently mired in a financial crisis of extreme severity, Jordan has high external debt (its net external liabilities exceed 110% of GDP) and Egypt, experiencing pressures on its managed exchange rate, is heavily dependent on tourist flows for hard currency receipts.

As well as other major economies, India is also vulnerable to energy supply shocks. Higher oil and gas prices would negatively impact growth, putting pressure on the rupee, making imports more expensive and widening the current account deficit. Sectors such as aviation, paints, tyres and chemicals would all be negatively affected.

In addition to all of these very real potential challenges, continuing conflict in the Middle East will take a toll on global risk sentiment. This may put additional upward pressure on the dollar and economies with external vulnerabilities, including several emerging markets and developing economies, may well experience severe repercussions. This will be particularly the case with counties such as Pakistan and Argentina which were already facing external debt problems and loss of confidence by international investors.

In addition, the fading of prospects for a new connectedness between Israel and longstanding Arab adversaries through the recently concluded Abrahamic Accords is bad news for a broader set of countries in the GCC and beyond. 

Overall, the most optimistic scenario is a rapid ceasefire in Gaza and some form of sustainable settlement reached between the opposing parties. Under these circumstances the longer-term economic consequences will be relatively mild. The worst-case scenario is that the conflict drags on and potentially spreads to other countries in the region. In this case, the impact on the global economy will be severe and potentially long-lasting.

David Gibson-Moore is the President and CEO of Gulf Analytica, he is also Chairman, Dalma Capital