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Middle East conflict adds new risks to global economic outlook

Published Oct 08, 2023 04:59PM ET Updated Oct 08, 2023 05:05PM ET
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© Reuters. An Israeli tank drives on a road following a mass infiltration by Hamas gunmen from the Gaza Strip, near Sderot in southern Israel October 8, 2023. REUTERS/Ronen Zvulun
 
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By Howard Schneider and Ann Saphir

DALLAS (Reuters) - The outbreak of military conflict in the Middle East may leave central bankers battling new inflationary trends as well as deal a blow to economic confidence at a time when they had expressed growing hope about containing the price surge sparked by the pandemic and Russia's 2022 invasion of Ukraine.

The stunning violence in Israel, with hundreds killed as fighters from the Hamas movement invaded from their Gaza enclave and Israel responded in force, added the possibility of a broader Middle East conflict to the sense of global instability sparked by Russian military actions almost 20 months ago.

The impact may take time to become clear, and would depend on how long the conflict lasts, how intense it becomes, and whether it spreads to other parts of the region.

"It’s too early to say" what the implications may be, though oil and equity markets may see immediate fallout, Agustin Carstens, general manager of the Bank for International Settlements, said in a presentation to the National Association for Business Economics.

But the war has the potential at least to add an unpredictable set of forces to a global economy that was already slowing and to U.S. markets still adapting to the likelihood that the Federal Reserve will maintain high interest rates longer than many investors had expected.

"Any source of economic uncertainty delays decision-making, increases risk premia, and especially given that region...there is an apprehension about where oil is going to open," said Carl Tannenbaum, chief economist with Northern Trust (NASDAQ:NTRS).

"The markets will also be following what the scenarios are looking like," he said, and whether, after decades of instability in the Middle East, this outbreak of violence evolves differently.

"The question will be is this iteration something that will throw the long-term equilibrium out of balance?"

BLOW TO CONFIDENCE

That and related issues will likely vault high on the agenda of global financial leaders gathering this week in Morocco for meetings of the International Monetary Fund and World Bank to take stock of a global economy that remains in a deep state of flux from the pandemic and rising trade tensions.

For central banks it poses the dilemma of whether it is likely to lead to new inflation pressures - the region is not just home to major oil producers like Iran and Saudi Arabia, but also to major shipping lanes through the Gulf of Suez - or deal such a blow to confidence that the economy stutters.

Federal Reserve officials have cited recent high energy prices as a possible risk to their outlook of gradually easing inflation, and also said that they felt the U.S. economy was likely to avoid a recession - absent some sort of unexpected, outside shock.

With conflict now raging in a major oil-producing region, the reaction among traders and major players like Iran and Saudi Arabia will be watched closely to see if another price surge is coming, while trading on bond and stock markets in coming days will show how markets anticipate the likely fallout.

"The conflict poses a risk of higher oil prices, and risks to both inflation and the growth outlook," said Karim Basta, chief economist at III Capital Management, leaving the Fed to sort out whether higher prices or slower growth is the greater concern.

Fed officials were already watching a recent rise in U.S. Treasury bond yields for signs investors may have pushed financial conditions beyond what was needed to cool inflation, and raised the risk of a too-stark economic slowing.

To the extent the Israeli war with Hamas heightens concerns about the global economy it could reverse that trend if capital rushes towards the relative safety of U.S. Treasury bonds, as often happens at times of potential crisis.

While falling market interest rates might under other circumstances be seen as a possible source of renewed inflation, encouraging consumers and businesses to borrow and spend, the context might lead to a different conclusion with emphasis on the perceived risks to the economy of a new regional war.

Middle East conflict adds new risks to global economic outlook
 

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Comments (9)
tom kazz
tom kazz Oct 08, 2023 10:38PM ET
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I wonder how Joe Biden's BBQ and live band went today?  Obviously he is not gonna cancel for a few dead Americans and some dead Israelis.  I wonder if they served pork?
David JC
ILoveQE Oct 08, 2023 9:54PM ET
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The evil head choppers had help from their overlords, the Iranians. Hamas didn't have technical expertise to execute an air, sea and land attack.  In the future, history will show that the Ukrainian-Russia and Israel-Muslim conflicts started WW3.
Jason Patcher
Jason Patcher Oct 08, 2023 6:59PM ET
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It would take 3-6 months to walk that if it was open territory, that would be a two year maze. I hope they don't go. It could be a trap.
Maximus Maximus
Maximus Maximus Oct 08, 2023 6:49PM ET
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blame netanyahoo. he brought the Palestinians to the point where they had nothing left to lose. that gave the extremists in hamas all the support and recruits they needed in order to carry this out. had the Palestinian people been given the chance to live in decency, peace, and prosperity, then this would never have happened. and no, I am not pro-war, I don't like to see anyone killed or hurt, Israeli or Palestinian...
Jason Patcher
Jason Patcher Oct 08, 2023 6:49PM ET
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good post
tom kazz
tom kazz Oct 08, 2023 6:49PM ET
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Ya, blame the victims for being murdered and raped.  Innocent children murdered.
tom kazz
tom kazz Oct 08, 2023 6:29PM ET
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Joe Biden murdered 700+ Israelis yesterday. Trump had the Iran terrorist regime on the verge of collapse and Potato Joe kept them afloat.
Jason Patcher
Jason Patcher Oct 08, 2023 6:29PM ET
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dont be ridiculous - that's like me blaming the plight of ~persians~ and Netanyahu's mistakes on the lack of nuclear power.
Maximus Maximus
Maximus Maximus Oct 08, 2023 6:29PM ET
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tom, you are simply wrong.
dylan mulvaney
dylan mulvaney Oct 08, 2023 5:58PM ET
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Please get Biden out of office before he starts WW3. He just gave $6 billion to Iran and not even a month later there is a war declared in Israel.
Jason Patcher
Jason Patcher Oct 08, 2023 5:58PM ET
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This place was neutral territory because of the crusades. we moved people there because of hitler. Decades of American lives and money and Muslim still can't overcome religious fanatics.
Adi Avivi
Adi Avivi Oct 08, 2023 5:31PM ET
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As an Israeli, I can assure you we won't rest until Gaza is wiped out (i am a left winger, but what happened is a different story, the worst day in 50 years). Iran will have to pay on their part of the bloody dealiest day we had yesterday
Richard Sharp
Richard Sharp Oct 08, 2023 5:31PM ET
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This is an investing site. I keep my emotions and concepts of morality out of the picture. This is a good opportunity to go long oil and gold. I will also be taking a short position against the Shekel this morning. I'd even short the Shekel if I was Israeli.
Adi Avivi
Adi Avivi Oct 08, 2023 5:31PM ET
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Not emotions. Fact: worst day we had in 50 years or even more. Iran is involved. one plus one...
Ant John
Ant John Oct 08, 2023 5:31PM ET
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So as long as you make money, thats all that counts. It doesnt matter about peoples lives
tom kazz
tom kazz Oct 08, 2023 5:31PM ET
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You voted for Joe Biden I am sorry but you helped create this.
Steve Swisher
Swish Oct 08, 2023 5:23PM ET
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Gold to pop.
 
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