Israel-Hamas Conflict and its Global Impact | 31 Oct 2023

Source: IE

Why in News?

The ongoing Israel-Hamas conflict has escalated due to Israel's ground offensive in the Gaza Strip, to eliminate Hamas. This has raised concerns about the post-conflict phase and its potential impact on the global economy.

• Bloomberg, a global media company has outlined three scenarios for the conflict and how each could affect countries around the world.

What are the Three Possible Scenarios for the Conflict and their Potential Effects?

• Limited Conflict in Gaza:
  • In this scenario, the conflict remains primarily localized in the Gaza Strip, with limited expansion into other regions.
  • Potential Effects:
    • Limited direct impact on the global economy. Nevertheless, this is unwelcome news for a world economy recovering from various setbacks, as central banks struggle between addressing inflation and preventing economic slowdowns.
    • The conflict can result in an increasing humanitarian crisis in Gaza, marked by significant casualties, with the death toll already surpassing 8,000.
• Regional Conflict with Iran-backed Militants:
  • This scenario involves a broader regional conflict, with the potential involvement of Iran-backed militant groups in Lebanon and Syria, as well as the Houthis in Yemen.
  • Potential Effects:
    • This could lead to escalation of violence in multiple regional locations, leading to increased instability and conflict..
    • Oil prices could rise to around the mid-USD 90s, higher than the current USD 90 per barrel,
    • Higher inflation rates globally, potentially denting global economic growth by 0.3% points.
• Full-scale War Involving Israel, Iran, and Major Powers:
  • The most extreme scenario envisions a full-scale war between regional powers Israel and Iran, with the possible involvement of major world powers such as the United States, China, and Russia.
  • Potential Effects:
    • The conflict could disrupt trade and global crude oil supply in the Middle East, affecting countries in the region and their trading partners.
      • Over 20% of the world's crude supply comes from West Asia, conflict in the region may drastically push up the Crude oil prices up to USD 150 per barrel.
      • Even with potential capacity from Saudi Arabia and the UAE, if they do not align with Iran, oil shipments may still face challenges in passing through the Strait of Hormuz, a 48-kilometer shipping chokepoint through which nearly one-fifth of the world's total oil production transits.
    • Global inflation could rise to about 6.7% in 2024, potentially causing global economic growth to slow by almost 2% points and leading to a possible worldwide recession with significant implications for countries like India and the US.