Gaza and Israel:
As well as causing immense human suffering, the conflict will affect economic activity in both Gaza and Israel. In Gaza, the conflict has led to significant damage to infrastructure due to Israeli airstrikes, as well as power cuts and shortages of basic necessities. In Israel, the government has called up over 300,000 reservists, straining labor supply. Investment and tourism in the country are also likely to be hit by the conflict.
The risk of contagion:
The conflict could spread beyond Gaza and Israel, leading to further human tragedy and impacting the economies not just of countries in the MENA region but also of those further afield. Fighting with Hezbollah, a fundamentalist militant group based in south Lebanon which fought with Israel for decades until the early 2000s, is a real possibility. This would likely devastate Lebanon’s already weak economy. There is also the possibility of a direct war with Iran, a major oil producer and rival of Israel. The country has for years been the main benefactor of both Hamas and Hezbollah, and while a direct Iran-Israel war does not appear likely for the moment, it would have a potentially large impact on the world economy were it to occur. A conflict involving Iran could lead to other countries getting involved—such as the U.S.—and significantly strain the supply of oil and thus raise its price.
Oil prices, investment, and rapprochement:
If it remains contained, the conflict’s impact on the global economy will be largely limited to higher oil prices; prices are trading above where they were at the onset of the conflict, and this is likely to remain the case in the near term due to investors demanding higher risk premiums. In addition, within the MENA region, the conflict will hurt diplomatic relations between Israel and Arab countries: These had improved significantly in recent years, particularly since the 2020 Abraham Accords brokered by the U.S., in which Bahrain and the UAE agreed to recognize Israel’s sovereignty. Further rapprochement between Israel and Arab countries—notably Saudi Arabia—now seems unlikely, at least in the near term, reducing stability in the region and likely affecting investment ahead.
Insights from our analysts
EIU analysts said:
“The war’s duration and scale will depend on whether a significant second front opens up in either Lebanon or the West Bank (not our main scenario). Israel is now likely to launch a ground offensive, with the challenge of how to manage a protracted presence in Gaza. An extended campaign (and therefore broader emergency government) is probable.”
Nomura’s Rob Rubbaraman and Craig Chan said:
“We see several possibilities with varying implications for the market. First, is an overly aggressive retaliation by Israel that results in high civilian casualties. This would anger the Arab world, derailing the Saudi-Israeli peace process, and Gulf Cooperation Council countries could respond by further restricting oil production. Next and related to the first, the conflict could spill into Lebanon via Hezbollah, which has strong historical ties to Iran, making it a two-pronged war against Israel. Finally, in the worst case, Israel could take direct military action against Iran. In this scenario, we could see the price of oil rise above USD125/bbl.”
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