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Israel-Gaza War: A Looming Threat to Global Economy

The conflict between Israel and Hamas, which has led to a major bombardment of the Gaza Strip, has raised concerns about its potential to destabilize the fragile economic recovery that many countries are experiencing. Finance ministers and officials gathered at the recent meetings of the International Monetary Fund (IMF) and World Bank in Morocco expressed alarm at the economic ramifications that could arise if this conflict escalates or spreads to the wider region.

The recent meetings in Morocco offered a platform for global economic leaders to discuss the growing economic challenges stemming from the Israel-Gaza war. Bruno Le Maire, France's finance minister, highlighted the risks, ranging from increased energy prices leading to inflation to a decline in confidence if the conflict extends further.

Kristalina Georgieva, the head of the IMF, emphasized that the situation posed a "new cloud on not the sunniest horizon for the global economy." This sentiment resonated among the delegates in Marrakech, who have growing concerns about the medium-term prospects for the global economy.

The key economic danger posed by the Israel-Gaza war is the potential for it to escalate into a wider regional conflict. Such an escalation could negatively impact global confidence and trigger fresh inflationary pressures in economies that are only just beginning to recover from recent price shocks. The IMF's analysis indicates that a 10 percent rise in oil prices could raise global inflation by about 0.4 percentage points.

Gita Gopinath, deputy head of the IMF, pointed out that the world is currently facing "a large number of shocks," including the Middle East conflict, which has significant implications for energy prices. Furthermore, the world is grappling with record levels of debt amidst a "higher-for-longer" interest rate environment, creating a precarious situation with significant potential for adverse outcomes.

Janet Yellen, the US Treasury secretary, maintained that she does not expect the conflict to be a "major likely driver of the global economic outlook." Nevertheless, it's essential to recognize that this conflict comes at a time when the world economy is in a vulnerable state, with a weak medium-term growth forecast.

Beyond the immediate concerns related to the Israel-Gaza war, the global economy faces several challenges. The IMF's short-term forecasts indicate a lack of clear bright spots in the global economy. Longer-term growth trends are worsening, marked by struggles to increase productivity, rising barriers to free trade due to political tensions, and growing public debt worldwide.

More than 80 percent of economies are facing bleaker prospects than they were 15 years ago, due to various factors like slower productivity and reduced population growth. The fragmentation of the global economy into competing blocs further exacerbates the situation, which is difficult to reverse and likely to be intensified by geopolitical tensions.

The IMF estimates that trade barriers alone could reduce global economic output by as much as 7 percent over the long term. Additionally, there are rising fiscal risks, with the global public debt ratio expected to reach nearly 100 percent of gross domestic product by the end of the decade. These concerns over debt sustainability come at a time when rising borrowing costs in the world's largest financial market, US Treasuries, are putting additional pressure on global borrowing costs.


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