Economic impact of the Gaza War
The Economic impact of the Gaza war is a crucial consideration in understanding the broader implications for global markets and economies after the tragic massacre of at least 1,400 Israelis by Hamas on October 7, followed by Israel’s military campaign in Gaza to eliminate the group, has presented four geopolitical scenarios that could impact the global economy and markets. Similar to many unexpected events, misplaced optimism might prevail, as is frequently observed with such disruptions.
Economic impact of the Gaza War in Israel Economy:
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Scenario-1:
Initially, the conflict primarily contained itself within Gaza, refraining from spreading beyond minor skirmishes involving Iranian proxies in neighboring areas of Israel. All involved parties actively strive to prevent any escalation of tensions across the region. The Israeli Defense Forces‘ operations in Gaza notably weaken Hamas, but unfortunately, this comes at the cost of a significant number of civilian casualties, thereby maintaining the delicate geopolitical landscape.
As support for him wanes, Israeli Prime Minister Binyamin Netanyahu resigns, although the Israeli populace remains resistant to embracing a two-state solution. Consequently, the ongoing plight of the Palestinians endures, causing diplomatic ties with Saudi Arabia to stall. Iran continues to wield a destabilizing influence in the region, causing ongoing concern for potential future conflicts by the United States.
Scenario-2:
In this scenario, market and economic impact of the Gaza war aren’t expected to be too severe. There might be a slight bump in oil prices initially, but that increase should level off since there’s been no disruption in oil production and exports from the Gulf. While there’s talk about the US potentially halting Iranian oil exports as a response to their destabilizing actions, it’s not very likely that such a drastic measure will be taken. Iran’s economy will likely stay stagnant due to ongoing sanctions, making it lean more on strong partnerships with China and Russia.
Israel might see a noticeable but manageable economic slowdown, while Europe could feel the effects of slightly higher oil prices and uncertainties tied to the conflict. That could affect both businesses and households, possibly nudging European economies, already on a slow track, toward mild recessions by limiting output, spending, and jobs.
The economic impact of the Gaza war is multifaceted and can take divergent paths depending on the aftermath. If the conflict results in a scenario where regional reconciliation and peace become plausible, there exists a potential for significant positive economic consequences. Should Israel’s actions against Hamas succeed without causing substantial civilian casualties, it might create an opportunity for more moderate factions such as the Palestinian Authority or a coalition of Arab nations to assume control in the region.
This shift could coincide with a change in leadership in Israel, with Netanyahu stepping down due to widespread loss of support. A new, more moderate Israeli government, whether center-right or center-left, may emerge, committed to addressing the Palestinian predicament and fostering improved relations with countries like Saudi Arabia.
Unlike Netanyahu’s administration, this new leadership might not actively pursue regime change in Iran. Instead, it could facilitate Israeli-Saudi rapprochement with the tacit approval of Iran in exchange for renewed discussions on a nuclear agreement, potentially leading to sanctions relief. This diplomatic maneuver could allow Iran to prioritize essential domestic economic reforms. Such a potential outcome could yield highly favorable economic dividends, both regionally and globally, by fostering stability, trade partnerships, and renewed diplomatic initiatives.
Scenario-3:
In the third potential scenario, the situation escalates into a broader regional conflict involving Hezbollah in Lebanon and potentially Iran. This escalation might unfold through different pathways: Iran, concerned about the repercussions from eliminating Hamas, might deploy Hezbollah against Israel to divert attention from the Gaza operation.
Alternatively, Israel might take preemptive measures against Hezbollah to mitigate this risk. Moreover, various Iranian proxies in Syria, Iraq, and Yemen might attempt to provoke Israel and US forces in the region as part of their destabilizing goals.
If Israel and Hezbollah engage in a full-scale war, it’s likely that Israel would target Iranian nuclear and other facilities, possibly with logistical support from the US. Iran, having armed and trained both Hamas and Hezbollah extensively, might exploit the broader regional turmoil to advance its nuclear weapon capabilities. Any Israeli – and potentially US – airstrikes on Iran could result in setbacks to energy production and exports from the Gulf lasting for months.
This could trigger an oil crisis reminiscent of the 1970s, leading to global stagflation—rising inflation and decreased growth. Stock markets would plummet, bond yields would fluctuate, and investors would flock to safe-haven assets like gold. The economic impact of Gaza war would hit China and Europe harder than the US, which now exports more energy than it imports, allowing it to impose taxes on domestic energy producers’ windfall profits to cushion consumers and non-energy businesses from the fallout.
Scenario-4:
The Economic impact of the Gaza War intertwines with these stark scenarios. In the final iteration, with a resolute Iranian regime and heightened regional militancy, prospects for peace dwindle, potentially imperiling Biden’s presidency. Alternatively, in the fourth scenario, if the conflict expands regionally with Iran witnessing leadership changes amid targeted assaults, Iranians’ support for moderates like Hassan Rouhani might shift the dynamics. These contrasting trajectories underscore the interconnectedness of conflict outcomes and their profound economic reverberations on a global scale.
The Economic impact of the Gaza War adds a layer of complexity to global economic forecasts amidst regional turmoil. The potential collapse of the Islamic Republic might herald Iran’s reintegration, potentially balancing the economic aftermath. Assigning probabilities to scenarios highlights the delicate balance between stability and potential widespread upheaval. With markets relying on more favorable outcomes, prudent preparedness remains imperative given historical misinterpretations of geopolitical shifts.
When gauging the likelihood of each scenario, I’d assign a 50% probability to maintaining the current situation, 15% to a post-war era of peace and progress, 30% to a broad regional conflict, and only 5% to a conflict that resolves positively.
On the optimistic side, there’s a 65% chance that the conflict won’t spiral extensively, indicating limited economic repercussions. However, the market’s estimation currently sits as low as 5% for a potentially severe regional conflict causing global stagflation, while a more realistic estimate might be closer to 35%.
Underestimating these potential risks is in itself risky, especially when there’s an 85% likelihood of a disruptive global scenario (comprising scenarios one, three, and four). While the most probable outcome might not immediately impact markets and the global economy significantly, it hints at a persistent unstable situation that could spark future conflicts.
Presently, markets appear optimistic, banking on the least impactful scenarios. Yet, history demonstrates that markets often misjudge significant geopolitical events. It wouldn’t be surprising if this pattern repeats itself.
Economic impact of the Gaza War underscores the delicate balance between localized conflicts and global repercussions. While immediate economic effects might vary, the specter of broader regional instability looms large. Understanding and preparing for potential economic aftershocks remains crucial, given the intricate interplay between geopolitical events and global markets.
