When the war between Israel and Hamas in the Gaza Strip broke out on the seventh of October last year, the business and investor community was pessimistic about the impact of this conflict on the global economy. However, the situation has escalated to the point where some are warning of a “global recession.”
Since 2020, the world has faced a series of crises that have affected the global economy, from the COVID-19 pandemic that paralyzed the planet to the Russian invasion of Ukraine, and most recently, the Hamas attacks that have sparked a seemingly enduring war.
Alexandre Kateb, a professor of economics at the Institute of Political Science in Paris, stated that the global economy “is heading toward recession”.
Kateb mentioned that “the war in the Middle East leads to greater risks for the global economy and creates uncertainty for investors, which is reflected in the tense conditions of today’s markets”.
An economic recession occurs when the gross domestic product (GDP) contracts for two consecutive quarters (six months), according to one prominent definition. A more broadly accepted definition by the National Bureau of Economic Research in the United States describes a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.”
“The Great Recession Scenario”
Larry Fink, CEO of the world’s largest asset management company, “BlackRock,” stated that “the war between Israel and Gaza, along with Russia’s invasion of Ukraine last year, has nearly pushed the world into an entirely new era.”
He highlighted that geopolitical risks are a key factor in shaping our lives, emphasizing that increased fear worldwide diminishes hope. This escalating fear reduces consumption and, in turn, creates long-term recession scenarios, according to the IMF.
Kateb further explained that “the global economy was already experiencing a slowdown before the outbreak of the current war, partly due to China’s reduced growth following COVID-19”.
He also remarked, “Russia’s invasion of Ukraine has shocked the European economy and pushed Germany’s industrial economy into an official recession.”
Additionally, he noted a “slowdown in growth in the United States, which could renew fears of a potential recession, even if it may be modest.”
Kateb warned that these factors contribute to the “Great Recession Scenario” in the global economy, amid the ongoing Israel-Hamas conflict.
The conflict between Israel and Hamas comes as the Russian-Ukrainian war pressures the markets, having caused “the largest shock to the commodity markets since the 1970s,” according to the World Bank’s chief economist.
A statement last week reported that this had implications that continue to disrupt the global economy today.
However, analysts believe that the “Great Recession Scenario” depends on the developments in the new Middle East war.
In this context, a political economist and advisor to the Arab Center for Studies warned that the potential of the Israel-Hamas war in Gaza turning into a regional conflict “will inevitably cast a shadow on the global economy, threatening to weaken economic growth and reignite energy and food prices.”
He explained that the energy sector is often negatively affected by international wars and tensions, which raise oil and fuel prices, impacting each country’s economy.
Since the war’s outbreak, there have been “mixed indicators related to oil supply and a prevailing uncertainty in the oil markets,” contributing to rising energy product prices and thus an increase in most commodity prices.
Food prices continue to rise faster than inflation in approximately 80 percent of the world’s countries, as reported by the World Bank in its monthly food security report released at the end of last month.
This increase is more pronounced in poorer or developing countries, where 60 to 80 percent are experiencing food price increases of more than 5 percent, with many exceeding 10 percent.
The World Bank warned that the conflict between Israel and Hamas could “cause a shock in raw material prices, such as oil and agricultural products, if the conflict escalates and widens in the Middle East.”
The World Bank expects the global average oil price to reach $90 per barrel in the fourth quarter of 2023 and to decrease to an average of $81 in 2024. However, the World Bank cautions that escalating conflict in the Middle East could drive prices significantly higher.
The World Bank‘s report indicates “three risk scenarios,” based on conflicts in the region since the 1970s, with increasing levels of risk and consequences.
The World Bank states that a “small disruption” scenario, equivalent to the oil production decrease during the Libyan civil war in 2011, could push oil prices to a range between $93 and $102 per barrel in the fourth quarter.
A “small disruption” scenario, according to DCCEW, comparable to the impact of the 2003 Iraq war, could reduce global oil supplies by 3 to 5 million barrels per day, increasing prices to between $109 and $121 per barrel.
The “major disruption” scenario, akin to the impact of the 1973 Arab oil embargo, could initially drive prices up to between $140 and $157 per barrel, a surge of up to 75 percent.
In all cases, geopolitical tensions in the Middle East tend to drive up oil prices, and market volatility is expected to characterize the oil markets in the coming period.
With countries already grappling with unusually high levels of debt, inflation, interest rates, and faltering investments, coupled with the slowest trade recovery in five decades, they would struggle to bear the burden of a new comprehensive war in the Middle East on top of the Ukraine conflict, complicating their path out of crisis.
Last week, the Japanese government warned of the potential impact of the Middle East conflict on the country’s economy through energy costs.
A Japanese Cabinet Office report for October mentioned that the government added the developments in the Middle East to the “factors requiring close attention because they could pose a negative risk to the Japanese economy.”
On Monday, oil prices rose after Saudi Arabia and Russia, the world’s two largest oil-exporting countries, confirmed they would continue their voluntary production cuts until the end of the current year.
Kateb emphasized that a significant slowdown is highly likely, according to projections by the International Monetary Fund and the World Bank, while also noting that the most pessimistic scenarios remain linked to geopolitical factors.