The geopolitical intentions of the armed conflict unleashed by Israel appear inscrutable. Even their great ally, the United States, does not show its capacity to intercede to stop the escalation of the war that Benjamin Netanyahu is managing with an iron fist under the protection of his ultra-Orthodox and far-right cabinet which greenized Greater Israel, the idea of domination of a vast territory stretching from the Nile to the Euphrates. Or, in another catastrophic scenario, “the ethnic cleansing of Gaza and the effective annexation of the West Bank,” as he admits. The country Israeli-British historian Avi Shlaim.
As much as the Biden administration fears a deterioration in the US economy ahead of the November elections – with signs exacerbated by the effects of hurricanes Helena and Milton and the dock workers’ strike – and although the list of risks grows without remedy, with transcendental issues in the global economic order. The uncertainties aroused among investors by the complex interplay of diplomatic and commercial alliances until we know who will be the next tenant – or lessee – of the Oval Office and the doubts about the Chinese economic recession, which seems worse than this that Beijing suspected and could miss the millionaire. resources of its recovery plan, intended for the dual mission of relaunching its activity and preventing capital flight.
The geopolitical escalation in the Middle East has already caused a first earthquake. Waiting for Tel Aviv’s reaction to the confined aftershock of Iranian missile fire on Israeli soil due to the destruction in Gaza, the invasion of the West Bank, the increasingly intense attacks against Lebanon and of the beheading of the leaders of Hamas and Hezbollah, could cause other or less collateral damage. Depending on whether one chooses the military bases, oil installations or uranium reserves of the Tehran regime as punishment. Regardless, the global economy began to shake. Essentially, for fear of slowing down the depreciation of the currency in the face of a new reappearance of inflationary spirals and new productive deteriorations.
“An open war [con involucración de los países árabes de la región, o global, si las potencias entran en la disputa] in the Middle East would exacerbate instability” in global markets, says Ahmet Kaya, senior economist at the UK’s National Institute of Economic and Social Research. In fact, “this has already put pressure on interest rates, trade flows and value chains” and added fuel to the fire on hot topics like the electoral tension in the United States or the more or less hard landing of Chinese GDP.
Kaya recognizes Business Insider that Israeli belligerence has undermined efforts to control inflation, which returns certain countries to stagflation scenarios, without excluding the possibility of recession phases in several of them – including the United States – and businesses must once again embark on new resilience exercises. A 10% increase in barrels would cut between 4 and 6 tenths from the common activity of industrialized countries and would increase the cost of maritime royalties by an additional 10%, causing a further slowdown of 3 tenths in the world economy, Kaya predicts.
Oil, detonator of the “economic bomb”
All this, if the risk premium for crude oil does not exceed 10% of the price that the dark energy market demands for future contracts in the sector. black gold in a context of strong geopolitical tensions. For the moment, American WTI and European Brent stand between 74 and 78 dollars, below the value of 84 recorded on October 7, 2023 – the day of the Hamas attack against Israel – and far from the 130 arrived in February 2022 after the Russian invasion of Ukraine.
But if the cross-attacks between Tel Aviv and Tehran were part of the region’s war toll, the impact on the economy would be immediate. Especially if, as Oxford Economics warns, Israel damages Iran’s energy infrastructure, the Ayatollah regime transfers this tactic to Saudi Arabia and other Persian Gulf emirates and the war ends up collapsing trade routes across the Red Sea or cause a blockade of the Red Sea. Strait of Hormuz, where 30% of crude oil sold on international markets leaves. The firm’s estimate is that an escalation of this scale would lift global GDP growth to about half a percentage point in 2025, which the IMF pegged at 3.3% this summer.
“Times are now different” compared to previous crises, such as the Israeli occupation of Lebanon in 2006. This is the feeling that predominates, underlines Javier Blas in Bloombergfor five geopolitical risks that did not exist then.
On the one hand, the United States is the world’s largest producer of crude oil, exporting more than 20.1 million barrels, while in 2006 it imported 12.5 million. On the other hand, the West will “do everything possible” to minimize reductions in quotas and offers, for example by resorting to American or Norwegian strategic reserves, by putting their central banks on alert so that they make use of their monetary bazookas.
Third, because producing countries like Saudi Arabia or Libya have shown their ability to restore their sales in the event of possible attacks on their installations – the key that triggers risk premiums – and security has become their guarantee for ensure sustainable income. Also because policies and reinsurance add protection to fossil companies. And finally because satellite navigation avoids, despite its imperfections, altercations with oil tankers.
However, Andrew Lipow of Lipow Oil Associates notes that “the market is pricing in a high probability of armed conflict between Israel and Iran”, despite the tense weekly calm. According to him, “everything will get worse if Tehran closes transit through Hormuz”.
In this case, “a near cataclysm would occur in the energy sector,” warns David Deitze of Peapack Private Wealth. Added to this is the sudden cut off of the international oil tap, the emergence of a risk premium on the barrel that is difficult to quantify and a dollar which is starting to function as a safe haven due to geopolitical tensions in the region.
Regional damage, international infections
However, the war also plunged Israel into economic abyss. Assaf Razin, professor emeritus at the Eitan Berglas business school at Tel Aviv University, believes that his country will suffer the consequences of the loss of investor confidence and the return of inflation. Even if also the economic immobility of the Netanyahu government which should forge other shields, but that of social protection, aimed at “correcting the gaps in inequality” and preventing “the economy from entering a vicious circle which puts financial stability and “international investor” status on the back burner. the country.
The OECD recognizes that, during the war year, Israel’s GDP contracted by 4.1% and that during the first two quarters of 2024 the recession was of magnitude: 1, 1% between January and March and 1.4% in spring. In addition to predicting that the prolongation of hostilities would harm their finances, business investments and household consumption in an economy that grew by 6.8% in 2021 and 4.8% in 2022. While the Bank of Israel estimates the cost of the war in 2025 at 67 billion dollars, it is too much – it judges – to apply budgetary discipline, despite military aid of 14.5 billion from the United States.
Fitch Rating, which lowered Tel Aviv’s sovereign rating to A in August, names military control as responsible for the deficit of 7.8% of GDP with which it will close 2024, on track to double the 4.1% of 2023. Additionally, he estimates that more than 60,000 Israeli businesses could close their doors this year due to lack of profits, disruptions in their value chains or lack of orders.
But the Israeli unrest looks like a fairy tale compared to the destruction – also economic – of Palestine. The World Bank estimates its GDP recession in the first quarter at 35%, the worst contraction in its history, while Gaza’s economy did so at 86% and that of the West Bank at 25%. Without trade, services, manufacturing or infrastructure, the collapse of basic services such as health care has plunged a population with more than 2 million displaced people and more than 42,000 dead into utter catastrophe. With defaults reaching $1.86 billion this year, double the hole the PA had to deal with in 2023, with no subsistence trade and triple-digit increases in essential goods. As part of a widespread loss of household income, even if in the West Bank it still affects nearly nine out of ten families.
In the two regional Arab powers, Iran starts with an extremely weak rial, adjustments and a lack of revenue, while Saudi Arabia has experienced capital flight and the military campaign in Yemen of the last decade has deteriorated a budget balance with extraordinary expenses due to the Vision. 2030 of Crown Prince Mohamed bin Salman and reduction in expected crude oil revenues
The IMF does not rule out “economic ramifications” from the Middle East, also envisaged by the governors of the central banks of the United Kingdom and Sweden, for whom their rate reduction strategies are subject to easing in the medium term. geopolitics in the region. which keep prices at bay. “The storm is not yet perfect, but the constellation of risks has aligned to the point of ruling out a hard landing” in GDP and global markets, says Tina Fordham, a former Citi analyst.
