Effect of Gaza Conflict on Middle East Geopolitics, Economy, and Market

In the first scenario, the war is still mainly confined to the Gaza Strip, with no regional escalation except for minor clashes with Iran’s allies in Israel’s neighboring countries; indeed, most players currently prefer to avoid regional escalation.

The Israel Defense Forces’ Gaza campaign is significantly weakening Hamas, resulting in many civilian casualties, and the unstable geopolitical status quo remains. Israeli Prime Minister Benjamin Netanyahu is leaving office, having lost all support, but Israeli public sentiment remains against the adoption of a two-state solution. Thus, the Palestinian issue escalates, the normalization of diplomatic relations with Saudi Arabia is frozen, Iran remains a destabilizing force in the region, and the United States continues to fear the next outbreak.

The impact of this scenario on the economy and the market situation is moderate. The current modest rise in oil prices will moderate as there will be no shocks to regional production and exports from the Persian Gulf. While the U.S. could try to block Iran’s oil exports to punish the country for its destabilizing influence in the region, it is unlikely that the U.S. will use such an escalating measure. Under the current sanctions, Iran’s economy will continue to stagnate, making it even more dependent on close ties with China and Russia.

Meanwhile, Israel will be hit by a severe but manageable recession, and Europe will feel some of the negative effects as the modest increase in oil prices and war-induced uncertainty erode business and household confidence. With reduced production, spending and employment, this scenario could lead the currently stagnant European economy to a mild recession.

In the second scenario after the war in Gaza…

2023-11-18 22:01:00
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