Potential extension of the war in Gaza will have disastrous consequences
In the photo, Israeli army forces gathered at the border with Gaza. [ERA]
Patricia Cohen/The New York Times
Fears that Israel's war in Gaza could escalate into a regional conflict hangs like a sword of Damocles over the global economy, as it threatens to stall growth and re-accelerate energy and food prices.
Rich and poor countries were holding their breath after three years of successive economic shocks, including the pandemic and Russia's invasion of Ukraine. Inflation was subsiding, oil prices were stabilizing, and the recession many had predicted had been avoided. And now some international financial institutions, as well as private investors, are warning of the risk of derailing the fragile economy. “This is the first time we've had two energy shocks at the same time,” comments Intermit Jill, a senior economist at the World Bank, referring to the impact on gas and oil prices of the wars in Ukraine and the Middle East. Price increases reduce the purchasing power of families and businesses, while increasing the cost of food production, exacerbating the already high level of food insecurity in developing countries such as Egypt and Pakistan.
The countries were already struggling to survive as they have high levels of debt, an investment deficit and the slowest recovery in trade in five decades. That is why it is extremely difficult for them to get out of the crisis. High interest rates further complicate the efforts of governments and businesses to secure credit and avoid bankruptcy. Mr. Gill's finding echoes the positions of American economists and analysts. Jamie Dimon, CEO of the American bank JPMorgan Chase, commented when the new war in the Middle East began that “this is perhaps the most dangerous time in the world in many decades”, while he called the war in Gaza “the most important thing for the western world”. Current economic problems have been exacerbated by escalating geopolitical conflicts. Tensions between the US and China and technological competition make it difficult to cooperate on other problems, such as the climate crisis, debt relief or violent regional conflicts. Such is the weight of political issues that they may reduce the effectiveness of traditional monetary and fiscal policy tools.
Federal Reserve Chairman Jerome Powell said on Wednesday that “it is not clear whether the war in the Middle East is going to have an economic impact” on the US, adding that “that does not diminish its incredible importance.” The oil-producing countries of the Middle East do not dominate the market as they did in the 1970s, when Arab countries drastically cut production and imposed an embargo on the US and its allies after their coordinated attack on Israel. The US is currently the world's largest oil producer, while alternative energy sources represent a larger portion of the world's energy mix. “It's a highly volatile, uncertain and scary situation,” emphasizes Jason Bordoff, director of the Center for Global Energy Policy at Columbia University, and adds that “most stakeholders, the US, Europe, Iran and the Gulf countries, agree that it is not it is in nobody's interest to extend the conflict beyond Israel and Gaza.”
He emphasizes, however, that a bad agreement, a wrong move or a misunderstanding could lead to escalation, even if the countries involved do not want it. Also a significant and prolonged decline in global oil production, regardless of what has caused it, can simultaneously stunt growth and accelerate inflation, leading to the disastrous combination called stagflation. According to Gregory Dako, chief economist at EY-Parthenon, the worst-case scenario would be an extension of the war that would drive oil prices to $150 a barrel, from around $85 today.
< p>Finally, war in the Middle East as well as economic distress may increase the flows of migrants to Europe and North America. And the EU, already on the brink of recession, is negotiating with Egypt, proposing to increase economic aid in return for Egypt to control immigration.
