If the Israel-Gaza war turns into a 'broad international conflict’, the world economy will be hit hard

The global economy is likely to be negatively affected if the Israel-Gaza war, now in its sixth week, evolves into a wider international conflict with multiple countries involved, according to a new report.

Daniel Murray, deputy chief investment officer and global head of research at EFG Asset Management, said stocks could sell off when high-quality bonds rally.

Defensive stocks will also perform well, while „gold and the Swiss franc can do relatively well given their status as safe-haven assets,” Mr Murray said.

The report said the likelihood of the current situation spreading is „remote” at this stage.

The Israel–Gaza War began on October 7 with a surprise attack by Hamas on southern Israel, which resulted in the deaths of approximately 1,200 people and 240 hostages.

Israel has retaliated with airstrikes and a blockade of the Gaza enclave, with the Palestinian death toll currently at around 11,500. As fighting erupted with Hezbollah in Lebanon, the death toll in the Levant country reached 77 as of November 13, according to its health ministry.

If the conflict persists, a large number of Middle Eastern countries could become involved and that could affect energy markets, the report said.

„With global energy supplies already disrupted by the Ukraine war, any shock to Middle East oil and gas exports will be difficult to offset,” Mr Murray said.

„Oil and gas prices may rise and there may be talk of stagnation. Central banks may become dovish and government bonds may sell off. Stocks may struggle in this scenario.

Oil prices initially rose when the war broke out, but fell in subsequent weeks on demand concerns as high inflation rates and tightening monetary policy continued to weigh on global economic growth.

Last month, the World Bank predicted oil prices could rise to $157 a barrel if the Israel-Gaza conflict escalates and causes major disruptions to crude supplies in the Middle East.

If more countries in the region, including Lebanon, Jordan, Syria and Iran and Yemen (directly or indirectly), go to war, it „will pose more risk to markets and expect more volatility . . . tail risk hedging becomes more expensive in such a scenario”, Mr Murray said. .

If the conflict is confined to Israel and Gaza, it is expected to have „minimal market impact,” and other Middle Eastern countries largely avoid engaging in other than occasional fighting, EFG said.

According to Standard Chartered Bank, the fighting is expected to be mostly along the Israel-Gaza borders.

However, the lender expects global growth to suffer amid continued war and expansion.

„If I were to break down our probabilities, I’d say it’s a 60 percent probability that it’s Israel-Gaza. [borders] Within the remaining 40 percent probability, it will be a 25-15 split,” Eric Robertson, managing director, global head of research and chief strategist at Standard Chartered, said at a recent press conference in Dubai.

In an escalation scenario, „we see a 25 percent chance within the Levant (region) and then a 15 percent very fat-tailed broad one happening,” he said.

„So … beyond a few hotspots there’s really something increasing, and from there, I think the debate is very uncomfortable,” he said. „Even though 15 percent is a small number, the impact on the region, the impact on the energy supply, when you add it all together, the impact is huge.”

If the war continues and oil prices rise due to supply disruptions, global growth will suffer, he echoed the EFG report.

„That story is not just relevant in the region, look at Asia, most of Asia, the economies are oil importers,” Mr Robertson said.

„India is a good example, South Korea is another, and if we see another conflict-driven rise in oil prices to $100 a barrel, I think most people’s growth projections, not just regionally, but globally will be affected.”

Updated: November 16, 2023, 8:11 AM