War in the Middle East: World Economy in Recession?

Like Middle East wars of the past, the conflict between Israel and Hamas  has the potential to disrupt the world economy. Bloomberg Economics estimates oil prices could soar to $150 a barrel and global growth drop to 1.7% — a recession that takes about $1 trillion off world output.

Today’s world economy looks vulnerable. It’s still recovering from a bout of inflation exacerbated by Russia’s invasion of Ukraine in 2022. Another war in an energy-producing region could rekindle inflation.

In the first, hostilities remain largely confined to Gaza and Israel. In the second, the conflict spills over to neighboring countries like Lebanon and Syria which host powerful Tehran-backed militias — essentially turning it into a proxy war between Israel and Iran. The third involves escalation into a direct military exchange between the two regional enemies.

In all these cases, the direction is the same — more expensive oil, higher inflation, and slower growth — but the magnitude is different. The wider the conflict spreads, the more its impact becomes global rather than regional.

Of course, the actual range of risks and possibilities is wider and more complex than these scenarios can capture. Even narrow economic chains of cause-and-effect have proved difficult to forecast amid the volatility of recent years -- and wars are much harder to predict.

One thing is certain: hopes for a more stable Middle East are now in tatters. In recent years, rapprochement between Saudi Arabia and Iran, and peace treaties between Israel and several Arab states — with the prospect that the Saudis might follow suit soon — raised expectations that the region might see an end to decades of strife.

Although oil price may rise in this strife, Malaysia’s exchange rate could still slide as foreign funds exit for safe havens. In addition, we are pro-Palestine and that sends a poor message to financial markets!

Reference:

Wider War in Middle East could tip the world economy into recession, Ziad Daoud, Galit Altstein and Bhargavi Sakthivel, Bloomberg, 13 October 2023