Global geopolitical tensions often play a pivotal role in shaping people's perceptions of economic growth. Research shows that concerns about such issues can make people and businesses more cautious about spending and investing, which can ultimately lead to a recession.
The same is true of the recent escalation of the Israeli-Palestinian conflict. Investors around the world are concerned about the impact of this war, especially given the already bleak outlook for global economic growth.
Hamas' October 7 attack on southern Israel is the latest chapter in a decades-long cycle of violence in the region that sadly seems to have no end in sight. Although the reasons behind these events are complex, it is easy to grasp the potential immediate and long-term economic impact of the conflict.
After all, if the war between Russia and Ukraine has taught us anything, it is that we should be mindful of the complex interdependencies that shape the world's economic and geopolitical landscape.
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The economic impact of conflict
Domestic and interstate conflicts often have a significant impact on stock market indices, exchange rates, and commodity prices, sometimes even leading to price increases in advance of hostilities. However, assessing the long-term economic impact is usually more complex. It can be difficult to predict the lasting impact that seemingly dramatic events will have on investor behavior.
Conflicts in the Middle East tend to lead to higher oil prices. Recall 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 of 1990. -91. The region accounts for almost one-third of the world's oil supply, so any volatile situation can create uncertainty in the market based on concerns about disruptions to global oil supplies.
This uncertainty is reflected in the risk premium in the oil market. This is the price paid for pre-traded crude oil in the futures market relative to the real-time price of crude oil. This reflects the profits speculators expect to make from buying and selling oil in times of conflict, as well as the hedging needs and supply and demand concerns of companies that produce and consume oil.
The impact of the recent conflict between Israel and Hamas on global financial markets will therefore depend on the involvement of other regional powers. If the conflict between Israel and Hamas continues, its impact will likely be limited, perhaps limited to countries exposed to direct trade with Israel or Palestine.
However, if the conflict spreads to major oil producers in the region such as Iran, the global economy could face serious repercussions as supply disruptions could send energy costs soaring for businesses and households.
Rising energy prices will hamper central banks' efforts to curb inflationary pressures in most developed and emerging economies. If this leads to a monetary policy of “increasing long-term interest rates,'' which keeps interest rates high, the cost of borrowing and refinancing for governments, companies, and citizens will rise.
History can provide some insight into how the global economic impact will play out under these different scenarios. For example, the 50-day war between Israel and Hamas in 2014 killed 2,200 people, mostly civilians, but had no significant impact on the global economy or financial markets.
But when Israel and Hezbollah clashed in Lebanon in 2006, oil prices soared globally amid fears of broader conflict in the Middle East.
What to expect this time
Unfortunately, there are other factors to consider at this time. The escalation of the Israeli-Palestinian conflict has occurred in parallel with the realignment of various global alliances. This slow movement toward “deglobalization” can be seen in recent changes in trade policy.
Countries such as the United States and the United Kingdom are increasingly buying products from different countries due to concerns about dependence on suppliers from potentially hostile regions and the impact that imports from low-wage countries will have on depressed local labor markets. economic activities such as procurement and manufacturing are being relocated.
At present, these changes can also be seen in the response to Hamas' attacks on Israel. The two-state solution to the Israeli/Palestinian conflict was first proposed by the United Nations in 1947 and reaffirmed in 1974 with near-unanimous support around the world.
However, the international response to the attack has been nuanced. While most Western countries were quick to express support for Israel's right to self-defense, countries such as China and Russia took a stand against Hamas and called for a ceasefire.
This suggests that the Israeli-Palestinian issue may be linked to a broader trend toward a new geopolitical divide that was already emerging before the Hamas attack.
A prolonged conflict between Israel and Palestine, especially with the involvement of regional powers, could further accelerate this global realignment and negatively impact global economic growth.
Read more: China-US tensions: How global trade began to be split into two blocs
Investors often invest in gold as eamesBot/Shutterstock.
Under these circumstances, investors are already bracing for increased volatility across the financial spectrum, from stocks and government bonds to commodity markets. So-called safe-haven assets such as gold are typically used to protect against overwhelming economic uncertainty. Gold prices have soared following the recent escalation in the Israeli-Palestinian conflict.
Financial markets will continue to monitor for signs of escalation in the conflict between Israel and Hamas. If oil prices rise further, concerns about rising inflation will be reignited.
Unfortunately, this situation comes just as inflation is beginning to slow again in many countries after two years of high consumer prices.