Since October 7th, 2023, Gaza has been suffering under an unprecedented scale of death and destruction. The massive blow represents a huge dent to the already precarious living conditions in the Gaza Strip and the persistent cycle of violence between Israel and Palestine since the establishment of the Zionist state in 1948. By January 28, 2024, more than three months into the military operation, the reported death toll has exceeded 26,422, with a majority being children and women, while over 65,087 individuals have been wounded (According to a report by UNCTAD). Additionally, many are reported missing, potentially trapped or buried beneath the rubble. As a result of the military operation, economic activity across all productive sectors in Gaza ground to a halt, eventually impacting the global economy.
The ongoing conflict between Israel and Hamas carries significant economic implications, both in the short and long term. Just as the Russia-Ukraine conflict showcased, such disputes can potentially disrupt the intricate interdependence that underpins global economic relations, regardless of their geopolitical implications. In a report from the World Bank, they expressed concerns about this war having the potential to cause a significant global economic shock. One of the potential consequences could be a drastic increase in the prices of items such as oil, leading to higher food prices and potentially causing millions of people to go hungry.
Both Israel and Palestine have significant roles to play in the global economy. Israel is crucial in the global supply chain and is a significant trade hub in the Middle East. It also plays a significant role in the global semiconductor industry, with many major chip manufacturers establishing production facilities or research centres within its borders. Some of these facilities are located in close proximity to Lebanon and the Gaza Strip. Additionally, Israel is a major exporter of potash, a vital component in fertilizer production. The Israel Chemical Group, holding exclusive mining rights to Dead Sea minerals and phosphate rock from the Negev Desert, ranks among the world’s top potash fertiliser producers. Israel has significant natural gas fields in the Mediterranean. To guard against Hamas attacks, Israel has stepped up the protection of its gas fields.
The continuation of the conflict poses risks to these exports and increases shipping costs, disrupting global trade routes along Israel’s coastline. If the conflict escalates further, it could lead to gas production and supply disruptions, impacting European energy markets. The price of oil and gas in the international market remains high and further rises, having the knock-on effect of inflation in most countries, including Western countries in Europe and the United States. Furthermore, the conflict causes these countries to try and strike a balance between the dual objectives of “suppressing inflation” and “stabilizing growth.”
The Middle East is one of the major sources of global oil supply, and the Palestinian-Israeli conflict could lead to a disruption of oil production in the region, reducing global oil supply and potentially leading to a rise in oil prices and an increase in the global energy cost. The impact of oil price hikes caused by wars and other geopolitical issues is not limited to supply or demand-side factors. The global oil market is an oligopoly in which OPEC and OPEC+ members decide how much crude oil to produce and supply through mutual consultation. Oil prices change depending on whether these countries increase or decrease production. The outbreak of unforeseen conflicts and the involvement of oil-producing countries in those conflicts cause oil prices to fluctuate dramatically by fueling market worries about a possible disruption in supply. If the conflict stays confined to Israel and Hamas, its impact is likely to be limited, and the only countries affected may be those that have direct trade contacts with Israel or Palestine.
However, if the conflict spreads to major oil-producing countries in the region, such as Iran and Saudi Arabia, the global economy could be severely affected, as energy costs could soar for businesses and households if supplies are disrupted. Crude oil prices have surged as a consequence of increased tensions in the global economy and markets brought on by the Israel-Hamas war. The United States West Texas Intermediate crude oil prices increased 3.85% to $85.98 a barrel, while Brent crude increased 3.44% to $87.49. Iran’s role in the Israeli attacks raises concerns about potential retaliation, which might jeopardize ships passing through the Strait of Hormuz, a crucial waterway that Iran had previously threatened. The extended conflict may change the dynamics of oil, which may affect the global economy. Countries may be impacted by high pricing owing to supply interruptions, and Iran’s participation may result in higher transportation and insurance expenses. Increased crude prices might put pressure on the currency and skew trade balances. The war’s immediate effects are seen in Israel, where the price of crude oil increased by 4%. This is a catastrophe of humanitarian proportions. The IMF forecasts that global economic growth will slow to 2.9% in 2024 and warns of war-related uncertainty. A rise in oil prices may cause inflation to rise by 0.4% and economic growth to decline by 0.15%. War-related disruptions, made worse by the current state of confrontations in Israel and Ukraine, will raise geopolitical tensions and destabilize the economy.
Today’s economy is still recovering from a bout of inflation exacerbated by Russia’s invasion of Ukraine last year. Another war in an energy-producing region could rekindle it. Amidst rising interest rates aimed at curbing inflation, businesses and households worldwide feel the financial strain. Many businesses are contemplating workforce reductions to cope with escalating operational costs while households grapple with soaring expenses for essentials like groceries and energy. During times of conflict, such as the Israel-Hamas war, consumer confidence becomes a pivotal factor in transmitting economic ripple effects. Like the aftermath of the Russia-Ukraine war, the Eurozone witnessed a notable decline in consumer confidence. The ongoing Israel-Hamas conflict has heightened uncertainty both regionally and globally, further impacting consumer confidence.
As reported by Bloomberg, Israel’s attacks on Gaza have resulted in a significant economic loss of nearly US$8 billion by mid-November. According to the Times of Israel, the country continues to incur daily losses of around US$260 million. The ongoing conflict is estimated to account for approximately 10% of Israel’s total economic output (GDP). Moody’s, a credit rating agency, is contemplating lowering Israel’s government credit rating from A1 due to these economic challenges.
The ongoing Israel-Hamas war could affect European economies via lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence. The Houthi attacks, which first targeted Israeli-connected ships and then expanded to include assets from the U.S. and Europe, are expected to increase if Israel’s invasion of Rafah in Gaza goes forward. Egypt’s economy, already in a state of crisis, is now at risk of further damage due to Israel’s conflict with Gaza and escalating tensions in the Red Sea. Its tourism revenues compared to the previous year, potentially leading to a loss of 4-11 percent in foreign exchange reserves and a decrease in GDP. The escalating oil prices are expected to raise import costs, consequently increasing prices for commodities and food items. This situation poses a significant challenge for the Indian economy. The olive trade in southern Lebanon, the main source of income for many, was halted as farmers stopped their harvests in fear of active shelling. According to the Minister of Agriculture, 40,000 olive trees were burned down by fires caused by IDF shelling, which brought a decrease in the Lebanese GDP. The brand boycott is another notable aspect of the war’s economic implications. Millions of consumers are boycotting products or brands that they believe are fueling the conflict. Particularly, American brands such as McDonald’s, Coca-Cola and Starbucks faced consumer boycotts over their support of Israel.
The economic repercussions of the Israel-Hamas conflict are felt on a global scale, manifesting in disruptions to trade, escalating oil prices, and consumer boycotts with far-reaching effects. The conflict not only exacts a toll on the economies of Israel and Gaza but also reverberates across neighboring countries and international markets. As tensions persist, urgent diplomatic efforts are required to achieve a resolution, paving the way for economic stability and prosperity in the region. Cancelling hostilities and implementing comprehensive peace-building measures are imperative to mitigate further economic fallout and foster long-term growth and development. The longer the war in Gaza plays out, the greater the potential for wider consequences well beyond the Israeli or Palestinian borders.
Author: Anika Tasnim
