The ongoing conflict between Israel and Hamas has had limited impact on the global economy so far. However, a potential direct war between Israel and Iran could lead to a significant rise in oil prices up to $150 a barrel and a global output cut of $1 trillion. This analysis comes from a new study by Bloomberg Intelligence and Bloomberg Economics, which looks at different scenarios and their potential impact on global GDP and inflation.
According to the report, a prolonged conflict could result in a global recession, slashing $1 trillion off global GDP and reducing growth to 1.7%. This would be the worst growth since 1982. Furthermore, the world economy is still recovering from an inflationary cycle exacerbated by Russia’s invasion of Ukraine in 2022, and another conflict in a critical energy-producing region could significantly raise inflation to nearly 7% this year.
The disruption of production in the Arabian Gulf region or a blockage of the Strait of Hormuz could lead Opec+ to shift to maximum output. Spare production capacity in Saudi Arabia, the UAE, and Kuwait would become irrelevant if the strait is shuttered. As a result, countries like Russia and Kazakhstan would benefit from higher prices by maximizing production to compensate for reduced output from Gulf countries in the cartel.
The report outlines various conflict scenarios, including a proxy war that could push oil prices to $100 a barrel, costing the global economy up to $300 billion. A confined war, characterized by limited Israeli airstrikes on Gaza and Hamas rocket attacks, may have a muted impact on the global economy. A scenario of a cease-fire would likely have limited impact on oil prices, as the current geopolitical risk premium appears negligible.
The authors of the report emphasize that the ongoing conflict poses a significant risk to global markets, with even a minor escalation potentially triggering a wider conflict. The recent Iranian attack on Israel serves as a reminder of the ever-present risk of escalation. A direct war between Israel and Iran would have catastrophic consequences for both the region and global markets, with a fragile stability that could easily shatter, leading to devastating human and social costs.
Overall, while the conflict between Israel and Hamas has not yet had a major impact on the global economy, the potential for escalation to a direct war involving Iran could have severe economic consequences. It is crucial for global leaders to prioritize diplomatic solutions to prevent further escalation and protect the stability of the world economy.
