Economic impact of the Gaza conflict on the EU is limited

Added to human suffering is the question of the economic impact of the conflict in Gaza, for the European Union for example. According to our latest research report, we believe that the effects will likely remain very limited (75%). Furthermore, the conflict is not expected to lead to a sharp rise in food prices. Therefore, the impact on inflation will also be minimal.

Johan Geeroms, our Directeur Risk Underwriting Benelux “The human drama unfolding in Gaza is obviously the major concern. The conflict also has economic consequences, for which our research department has imagined several scenarios. The worst can be expected. But we most likely estimate that hostilities will continue until 2024, although confined within and around Israel's borders. This will also limit the economic impact. However, our analysts believe that the conflict will slightly reinforce stagflation (high inflation/low economic growth).”

No increase in oil prices

Take the example of the price of oil, which experienced a sharp rise for a moment immediately after the outbreak of the conflict, but then fell back to $80. This level is lower than that which prevailed just before the start of the conflict. In general, we assume that raw material costs, including transportation, will increase by +5%. We also believe that major trade corridors, such as the Suez Canal, will remain open. Overall, the conflict will produce a slight stagflationary effect. We have revised downward our forecast for global GDP growth in 2024 by -0.1 percentage points to +2.3%, and we have raised our forecast for inflation by +0.1 percentage points to 4, 4%.

One of the side effects of the conflict is that it reinforces the trend towards deglobalization. Since the coronavirus crisis, the main trading countries have already brought their economic activities closer to their territory. This situation is only getting stronger. The general geopolitical unrest in the country is intense. This is not a favorable environment for investment, as it leads to a decrease in economic activity.

Worst case scenario

Although we consider it unlikely that the conflict will lead to regional escalation, we have also considered the most pessimistic scenario. In this case, we assume direct intervention by Iran and the United States. We estimate this probability at 20%. We could expect a situation similar to the oil embargo of 1973-1974. The price of oil would then reach a record high, leading to a global recession. Stock markets would also be significantly affected.

We draw attention to the precarious balance of the global economy. Even if the conflict remains contained, the situation is delicate, because the current global economy remains fragile. Indeed, we are still affected by the wave of inflation which followed the coronavirus crisis and which continues today. The war in Ukraine is also weighing on confidence. Several key countries will hold elections next year. Great uncertainty therefore reigns. It doesn't take much more to further unbalance the current situation.

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