Israel-Hamas conflict tears holes in global economic recovery

Markets stalled, investment plans put on hold as investors await direction of the conflict

A Palestinian girl holds two children as she stands on a street in Gaza city as Israel continues to launch air strikes. AFP

Smoke plumes billow during Israeli air strikes on Gaza city. AFP

A Palestinian girl following an Israeli air strike in Khan Younis. Reuters

Palestinians survey the rubble of a house destroyed in Israeli strikes in Khan Younis, in the southern Gaza Strip. Reuters

A Palestinian woman, covered in dust, carries a child in Gaza city. AFP

A Palestinian man with a child outside al-Shifa hospital in Gaza city. AFP

Israeli soldiers walk through Kibbutz Be'eri. Days earlier Hamas militants killed more than a hundred civilians near the border with Gaza. Getty Images

A wounded Palestinian man Ala Al-Kafarneh, who survived Israeli strikes, attends a hospital in Gaza city. Mr Al-Kafarneh lost his pregnant wife and several members of his family in air strikes after they fled Beit Hanoun. Reuters

Supermarket shelves containing dry goods are left depleted in Tel Aviv. Getty Images

An injured Palestinian man arrives at Al-Shefa hospital in Gaza city. EPA

A boot lies on the ground outside a damaged house in Be'eri, Israel. EPA

An Israeli army self-propelled howitzer near the border with Gaza in southern Israel. AFP

Palestinian mourners during the funerals of Al-Agha family members killed in Israeli strikes in Khan Younis in the southern Gaza Strip. Reuters

Family and friends of May Naim, 24, who was killed by Palestinians militants at a party near the Israeli border with the Gaza Strip, during her funeral in Gan Haim, Israel. Getty Images

Palestinian children in Khan Younis fill bottles with water from public taps during the conflict with Israel. Reuters

Men outside a morgue in Khan Yunis console a woman mourning loved ones killed in an Israeli air strike. AFP

A Palestinian girl injured in Israeli strikes is taken to hospital in Gaza City. Reuters

An Israeli woman is evacuated by paramedics following a rocket attack launched from the Gaza Strip into Israel, in Sderot. Reuters

A man looks at the destruction in the ravaged Jabalia refugee camp, following overnight Israeli air strikes. AFP

The daughter of Zakaria Abu Maamar, a member of Hamas's political office, at her father's funeral, after he was killed in an air strike in Khan Younis. Reuters

A collapsed building after an Israeli bombardment in Gaza City. AFP

Firefighters attend a burning building after an Israeli bombardment in Gaza City. AFP

Women and children in Gaza City. AFP

An Israeli army soldier passes a Merkava battle tank in northern Israel near the border with Lebanon. AFP

An Israeli strike on the port of Gaza City. AFP

Demonstrators outside the West Los Angeles Federal Building in California during a rally in support of Israel. AFP

Mourners at the funeral of Palestinians killed in overnight Israeli shelling in Khan Younis in Gaza. AFP

Israeli journalists take cover during a rocket attack from Gaza in the southern Israeli kibbutz of Kfar Aza near the border. AFP

Palestinians rescue a young girl from the rubble of a destroyed residential building following an Israeli air strike. AP

People mourn at the graveside of Eden Guez, who was killed as she attended a festival that was attacked by Hamas gunmen from Gaza that left at least 260 people dead, at her funeral in Ashkelon, in southern Israel, October 10, 2023. REUTERS / Violeta Santos Moura

An Israeli fireman recovers after extinguishing cars set on fire by a rocket fired from Gaza. AP

Smoke billows from a boat after a strike by Israel on the port of Gaza City. AFP

Destroyed residential buildings in Gaza City. AP

Rockets from Gaza launched towards Israel. Reuters

A Palestinian woman sits among the rubble in the destroyed Al-Ramal neighborhood following an Israeli air strike in Gaza City. EPA

Israeli soldiers in armoured vehicles near the northern town of Kiryat Shmona close to the border with Lebanon. AFP

Buildings destroyed by Israeli strikes in Gaza city. Reuters

Nicole Izsak, right, confronts a Palestinian supporter near the Israeli consulate in New York, claiming her cousin is being held hostage in Gaza. AFP

The abandoned site of the Supernova music festival, besieged by Hamas militants in southern Israel. AFP

An attack on the site by Hamas gunmen from Gaza left at least 260 people dead. Reuters

A man carries a blood-stained flak jacket belonging to a Palestinian journalist, who was killed with two colleagues when an Israeli missile hit a hospital building while they were outside reporting, in Gaza city. Reuters

An Israeli soldier holds a rescued dog as he takes position near a bomb shelter in Kibbutz Kfar Aza, southern Israel. Reuters

Protesters chant and wave the Palestinian flag at a rally in Melbourne, Australia. Getty Images

Israeli border police walk past a burnt-out car as rockets are launched from the Gaza Strip towards Israel, in Ashkelon, southern Israel. Reuters

Palestinians amid the rubble following Israeli air strikes that razed a neighbourhood in Gaza city. AP

Palestinians carry a wounded man at Al Shifa Hospital in Gaza city. EPA

Palestinians inspect damage in the aftermath of Israeli strikes in Khan Younis, southern Gaza Strip. Reuters

Just as the world was settling down, uncertainty has returned with a vengeance.

Yes, there is a war in Ukraine, but it is approaching its 600th day. Economies have long ago put in mechanisms to cope. Same with Covid. Old news in most places.

Inflation, cost of living. They’re being tackled, if somewhat hesitatingly.

But the Israel-Hamas conflict, this is throwing everything into the air, and then some.

Tellingly, the markets are stunned. Sure, there are the predictable, knee-jerk responses. Gold, the usual safe haven, is climbing, as are oil prices and defence stocks. Airline shares are falling. Significantly, that’s all there is. Not much else is moving, and as for forecasters they are saying little.

That’s because they don’t know what to say, what to do. Best to remain silent and do nothing at all in that case.

Right now, they can’t see an end. It may turn into something much bigger, wider and prolonged, with far-reaching consequences. Nobody knows.

Economy-wise, Israel is not Ukraine, it’s not a grain store for the rest of the world. It does not possess large fossil-fuel resources, although Israel and the Eastern Mediterranean region harbour ambitions for the Tamar offshore field to become a hub for natural gas exports to Europe.

Bring in Iran into the conflagration, however, and the likely fallout dramatically escalates. Then, oil supplies and the passage of tankers through the pivotal Strait of Hormuz are impacted. The position of Saudi Arabia, seemingly near to reaching a normalisation accord with Israel, is severely challenged. US, Russia, China, what parts will they play?

Across the City, Wall Street, Dubai and the other financial centres, investment analysts are reduced to watching, same as most people. Any glimmer of so-called intelligence is seized upon; a scintilla of a clue, a hint, is grabbed and pored over, and almost certainly hyped and oversold.

Economic uncertainty looms as Middle East tensions rise, with potential global ramifications hinging on key players like the US, Russia and China. AFP

What it all means in the immediate term is inaction. Prior to the Hamas attack, there was a shortage of corporate deals. Mega-takeovers, mergers, investment announcements, new ventures, IPOs – they were few and far between. At a London party last week attended by City leaders, just as the terrorists were finalising their horrific plans, there were moans about the lack of big-ticket mandates. Those that are in the pipeline are going to be staying there for some time; no one faced with such potential unpredictability and volatility wants to commit.

Central bankers were already preoccupied with trying to bring inflation down, a fight they were just about winning, but one that was by no means over. Again, the likelihood of them relaxing the tight pressure has been put on hold.

As the IMF says in its latest World Economic Outlook, released just this week, inflation remains stubbornly above target in a whopping 93 per cent of economies that have set the goal of bringing it down. In "most cases", says the IMF, inflation will not return to its desired level until 2025 at the earliest.

The report was prepared before Hamas fired its first rocket salvos and began tearing holes in the security cordon. What does it mean, even more so with events in Israel? Interest rates are unlikely to be dipping anywhere any time soon, and global growth will bumble along the bottom.

Meanwhile, the high cost of international borrowing has continued to push up bond yields and provoke instability in the bond markets. That, in turn, has led to jitters about banks’ exposure and the possibility of further collapses after Silicon Valley Bank, which went under this year, causing a crisis that engulfed the once mighty Credit Suisse.

Amid global inflation challenges, the IMF's recent outlook points to uneven economic growth forecasts. Tensions in Israel and shifting geopolitical dynamics further complicate an already fragile world economy. Bloomberg

The IMF provides little reassurance. Put simply, the world was not in a buoyant place financially before Hamas struck. It certainly isn’t now.

The US is one of the few large economies to have its growth forecast upgraded by the IMF, to 2.1 per cent in 2023 and 1.5 per cent in 2024. By contrast, the eurozone has gone in the reverse direction, cut to 0.7 per cent growth this year and 1.2 per cent in 2024. Once Europe’s muscular powerhouse, Germany is suffering, its output is predicted to fall 0.5 per cent in 2023, before rising by a measly 0.9 per cent in 2024. Not that the UK is faring much better: it is just avoiding flat lining, with the IMF saying the country’s economy will expand by just 0.5 per cent in 2023 and 0.6 per cent in 2024.

As for Israel itself, the economic damage from the attacks is being contained. The Bank of Israel is selling $30 billion of reserves to prop up the shekel after its currency fell to a seven-year low. The bank has about $170 billion of foreign currency holdings left, which should be ample.

The shekel was already one of the worst performing major currencies, down by more than 10 per cent against the dollar, mostly due to concerns about the ability of the government to impose itself on a resistant judiciary. While those worries have evaporated in the face of urgent domestic calls for national unity, the longer-term economic loss to Israel is one of opportunity. Hamas hit just as anticipation was building for a trading bonanza in the years to come between Israel and Saudi Arabia. Presumably, that closer link is similarly consigned to the back burner.

While there is sabre-rattling by the major powers, the fact is that should the Israel-Gaza war widen, none of them is in strong shape economically to intervene. The US is struggling to reduce inflation, Russia is consumed by attempting to win a drawn-out war and trying to combat sanctions, China is still feeling its way gingerly from the Covid crisis and its weak property market has undermined consumer confidence.

The key message from the markets, then, is sit tight. Stay calm, if that is possible, and hope and pray.