GRIMALDI & PARTNERS: Global economic impact of the Israel-Hamas war: IMF warning

By Silvano Grimaldi, CEO of the independent asset management GRIMALDI & PARTNERS AG

Zurich – The Israel-Hamas war is in its fifth month. An expansion of the war in the Middle East is still not averted. The ongoing attacks by the pro-Iranian Houthi militia from Yemen on ships in the Red Sea have already had a negative impact on international trade in goods. Will the situation in the Middle East continue to escalate? Should investors expect setbacks on the stock markets? Silvano Grimaldi, CEO of the independent Swiss asset management company Grimaldi & Partners AG, gives you answers to these questions.

The International Monetary Fund (IMF) warns
Developments in the conflict between Israel and Hamas have raised concerns around the world, particularly regarding their potential impact on the global economy. The International Monetary Fund (IMF) has warned of far-reaching economic consequences of this conflict and described the situation as an additional threat to an already tense global economic situation (due to the Ukraine war, tensions between China and Taiwan, among others). An ongoing Israel-Hamas war highlights the delicate balance of global markets and the potential dangers of geopolitical unrest.

Oil prices under pressure
In direct response to the escalation of the conflict, significant changes have been observed in global markets, particularly in oil prices. After the Hamas attacks, the price of oil briefly rose above the $90 mark, fell slightly in the following weeks, but rose again after the publication of the International Energy Agency (IEA) report, which had strong consequences for the oil market in the medium term the exchange of blows between Gaza and Israel.

Possible expansion of the conflict: Iran and regional tensions
There is great concern about the possible expansion of the conflict to the entire Persian Gulf, which contains 40% of the world's oil supply. With more than a third of global maritime oil trade going to the Middle East, markets continued to closely monitor the situation in the Middle East. Reports from the Wall Street Journal suggest that Iran, an otherwise historic ally of Israel, may be involved, which could further strain Iranian-American relations. Iran's withdrawal from the oil and gas market would have significant consequences as the country has recently increased its oil production and can therefore influence global price movements.

Risk of a global recession
Pierre-Olivier Gourinchas, chief economist of the IMF, pointed out in his annual report on the global economy that a sustained increase in oil prices of $10 could reduce global GDP by 0.15 percentage points. A rise in energy prices could lead to increased inflation and slower economic growth. Especially at a time when the leading central banks have aggressively increased key interest rates in the fight against rising inflation, a permanent increase in the price of oil would be a threat to the successful fight against inflation and to the recovery of the global economy.

Influence on central banks' monetary policy
The conflict could influence decisions by central banks in Europe and America. A significant slowdown in growth caused by rising oil prices could prompt the Federal Reserve to cut interest rates faster than expected. Whether this could avert a severe economic downturn remains an open question. In any case, a recession would definitely have a negative impact on the company's earnings situation. This would mean setbacks on the stock markets.

Conclusion
The price fluctuations on the oil market, characterized by alternating rises and falls, are currently primarily a barometer of geopolitical uncertainty. Oil prices have now broken away from the high following the Hamas attack and are hovering around the $80 mark with a slight downward trend. This may also have something to do with a certain “habit effect” in the Israel-Hamas conflict and should therefore be seen as positive for the stock markets. Nevertheless, this conflict has highlighted the vulnerability of the global economy to geopolitical tensions. And because anything associated with unpredictability and uncertainty is poison for the financial markets, it is in the interests of all economic actors to actively invest for economic and political stability. And in fact, a positive consequence of the current military conflicts is the increasing awareness of the international community that international cooperation must be strengthened in order to maintain global economic stability of the markets. Because peace is the prerequisite for the prosperity of international markets, and thus of financial markets, the lesson is once again: Peace is not a “free lunch”!