The economic backdrop to the conflict in Gaza

Western leaders offer public backing to Israel while quietly working to find an interim solution to the conflict in Gaza. These efforts are accelerated due to the urgency of mitigating potential unfavorable consequences from a geopolitical point of view, preventing China and Russia from exploiting the situation in the Middle East to their own advantage. In addition, policymakers are focused on maintaining domestic political stability and protecting their economies from potential negative impacts arising from geo-economic ramifications. 
In this context, a temporary solution is sought to avoid an escalation that could trigger significant global economic and political consequences.

The need to prevent the exploitation of the conflict by powerful external actors and protect internal stability drives these efforts, where priority is given to containing the economic and geopolitical impact in the midst of an increasingly complex and challenging global landscape. 

In the early stages of the Middle East conflict, changes in oil prices suggest that market participants, including financial institutions, have opted for the most likely scenario known as the "baseline scenario." According to this shared view, the impact on the global economy is expected to be minimal, especially if other oil-producing countries can compensate for any loss of Iranian production by using their spare capacity.

In this scenario, the current conflict would essentially be a repeat of past events, with Israel temporarily occupying part of Gaza and tighter enforcement of U.S. sanctions on Iranian oil.resembles past events and does not pose an immediate and unexpected threat to the global economy. 

Markets are also contemplating a negative scenario in which the conflict escalates to Israel's borders with Lebanon, turning into a proxy war between Iran and Israel. In this scenario, the economic implications would be profound. The escalation could lead to an increase in oil prices ranging from 10% to 40%, depending on the extent of the expansion of the conflict and the involvement of various actors. This scenario suggests a significant impact on financial markets and the global economy, with potential consequences for world economic stability. 

Such a major impact on the oil market could derail global efforts to stabilize prices, leading to a global inflation rate exceeding 7% in the coming year. In the U.S., reaching the 2% inflation target set by the Federal Reserve would be difficult, exacerbated by a looming $2 trillion budget deficit, driven by factors such as an aging population and rising spending on health care and interest services. If this trend persists, by 2025, the deficit could exceed defense spending, reaching 18% by 2028. 

In Europe, especially in Germany, these developments could exacerbate the existing cost-of-living crisis and deplete essential fiscal buffers. Germany, being the engine of the European economy, faces significant challenges. Any further shocks in the global market are expected to severely impact its manufacturing sector, which is already strained due to the ongoing restructuring of the global geo-economic order.

So far, the most likely scenario remains the baseline scenario. Departing from this route could carry significant global economic consequences. Should Iran choose to close or disrupt the strategic Strait of Hormuz, through which 20% of the world's daily oil supplies pass, available production capacity may not be sufficient to mitigate the impact. Moreover, there is the additional risk of China and Russia exploiting the conflict in their own interest. 

Mohamed Filali. Founder and chief executive of JuriFiscal