subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now
Israeli security gather near a rifle at the site of a battle following a mass infiltration by Hamas gunmen from the Gaza Strip, in Sderot, southern Israel October 8, 2023. Picture: RONEN ZVULUN/REUTERS
Israeli security gather near a rifle at the site of a battle following a mass infiltration by Hamas gunmen from the Gaza Strip, in Sderot, southern Israel October 8, 2023. Picture: RONEN ZVULUN/REUTERS

War has broken out in the Middle East and there is much concern about how it could affect the global economy and financial markets. Prior to the latest conflict the most recent experience markets have had with war is Russia’s invasion of Ukraine in February 2022, which has had a profound impact on economies and financial assets.

Russia and Ukraine are important exporters of wheat, oil and natural gas, and the onset of hostilities there caused a spike in food and fuel prices. Brent crude rose 40% and wheat by 45% between January and June 2022.

Those increases could not have come at a worse time. They re-accelerated already high inflation and generated a global cost-of-living crisis. Some wheat importing countries such as Egypt remain in fiscal crisis and are still experiencing adverse welfare and economic effects to this day. It makes sense, then, that many worry there could be similar economic outcomes should the Israeli-Palestinian war spread. 

The market seems to be taking events in the Middle East in its stride though. Oil prices are up slightly, but remain off recent highs, and the same goes for food prices. That suggests investors see the latest violence more as a shock to global confidence, which could see rates being cut sooner, with the dollar weakening and US Treasury yields dropping after markets opened.

Even so, I’m not sure that we should be jumping to conclusions based on what we have seen so far. Israel is not a systemically important actor in any commodity market, so there should be no adverse market impact along the lines of what we saw with the Russia-Ukraine war. However, it is an important player in geopolitical relations in the Middle East, and this conflict could still lead to some important market-moving shifts in that regard.

It is far too early to tell how long this war will last, whether it will draw in other Middle East actors, and what effect, if any, it will have on already unstable geopolitics beyond the region, especially if it draws in Iran and is exploited by other strategic powers.

Even before the start of this conflict the global economy was expected to experience low growth. In its latest World Economic Outlook report, published on Tuesday, the IMF forecast that global GDP growth would decelerate slightly to 2.9% in 2024 from an already lousy 3% in 2023. The OECD estimates that growth will slow to 2.7% in 2024. A number below 2.5% is considered a global recession.

Sinking expectations

Expectations continue to sag amid tight monetary policy, shrinking manufacturing and a China beset by economic malaise. Curently, the only vital parts of the world economy are oil exporters and the Americas. Even so, US demand is slowing, though slowly, and oil prices cannot withstand high US rates.

The world is forecast to remain in a low growth equilibrium for another year, but forecasts are subject to continuous revision. So far, revisions for growth outside the US are negative, and absent monetary policy easing they are likely remain so. The risk of a global recession was on the rise before the shock of a possible escalation in conflict was added to the mix. That seems to be what financial markets are also seeing.

The next global recession is only one piece of bad news away. Recessions are painful and come with unforeseen consequences. That makes it particularly important the Israeli war is managed in a manner that limits the fallout for the global economy.

Of course, we cannot foresee what will happen, but the need to retain a cautious investment approach, already high given recession risks, will be more pronounced. An escalation in conflict is never good, but it’s especially bad at the moment.  

• Lijane is global markets strategist at Standard Bank CIB.

subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now

Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.