This week, we analyzed three important issues:
- First, one month on, we wanted to share our latest economic scenarios for Israel – Hamas conflict. As of today, tensions look set to develop into a protracted but contained conflict (75% probability). The impact on global commodity prices and inflation remains very contained as initial conditions were already very tight. Overall, we expect a slight stagflationary effect on the global economy, with little impact on capital markets. In a downside scenario of severe escalation into a regional conflict with direct intervention of Iran and the US, OPEC+ countries could decide on a drastic cut in oil production, echoing the 1973-1974 oil embargo, and fears of a disruption in commerce in the Strait of Hormuz would soar. This would lead to record high oil prices and cause a recession for the global economy. Capital markets would be also severely affected, with equity indices likely to fall by -7% in the US and -9% in the Eurozone, alongside widening credit spreads.
- Second, it’s one step forward, two steps back on climate targets. European governments are procrastinating on their climate goals. The UK and Sweden have already announced rollbacks on climate goals, while resistance and skepticism towards existing targets are growing in other economies. The ongoing cost-of-living crisis and climate populism may explain this unfortunate movement. The energy, transport and housing sectors face the most pressure as they directly impact voters' lives. Sobering news for climate month.
- Third, the drought at the Panama Canal could prolong the trade recession. The number of vessels that can pass through the Panama Canal will be halved to 18 vessels per day starting in February 2024, particularly affecting US exports. After global trade bottomed out, such disruption fuels fears of higher imported inflation. The drought also hints at what lies ahead as global temperatures increase: by 2030, rising temperatures could lead to a -38% decrease in transportation capacity, reducing potential growth in global trade of goods in volume by -5pp per year. The physical costs of climate change are real.