Israel-Gaza war forces economists to rethink outlook at IMF's Morocco meeting

Economists must contend with another layer of uncertainty as they try to predict the fallout of the conflict on Mena economies

Israeli tanks stand along the border with Gaza in southern Israel, as battles between Israel and Hamas continue. AFP

When global thought leaders prepared their exhaustive lists of challenges they planned to address ahead of their arrival at the World Bank and International Monetary Fund’s annual meetings in Morocco, a new conflict with global reverberations was certainly not part of it.

But as they descended on Marrakesh on Monday for their week-long engagements in the historic Moroccan city, the Israel-Gaza war unfolded on television screens around the world.

Suddenly, the policymakers, government officials, corporate bosses, civil society representatives and finance leaders had another item on their agenda that has been widely discussed but little commented on in public.

Economists are also scrambling to reconfigure their risk assessment models as they try to re-evaluate their economic forecasts – diligently prepared ahead of the annual meetings – to reflect the impact of this unprecedented escalation between Israel and Hamas, which rules Gaza.

The knee-jerk reaction in oil prices in the first few days of the war, as well as a slump in Middle Eastern markets, underpinned the significance of the conflict.

However, the unfolding tragedy, civilian casualties and the siege of Gaza, which the UN says is turning into a humanitarian crisis, is at the forefront of everyone's mind and mentioned in almost every economic press briefing.

The death toll on both sides of the Israel-Gaza border has risen to 2,800.

Kristalina Georgieva, managing director of the IMF, described the loss of life in the Israel-Gaza war as “tragic”.

“It's heartbreaking to see innocent civilians dying,” she said at a press briefing in Marrakesh. “An attack from one place on another, causing reciprocity in response [and] who pays the price? It is the innocent who pay the price.”

The leadership of both IMF and World Bank, as well as economists and executives, said the conflict is being “closely monitored”.

“Very clearly this is a new cloud on not the sunniest horizon for the world economy … darkening the horizon, [which] of course was not needed. Let’s pray for peace,” Ms Georgieva said.

Ajay Banga, president of the World Bank, who also called for a rapid de-escalation of the conflict, telling Reuters that it is an “unnecessary human tragedy” and the “global economic shock” will make it harder for central banks to achieve soft landings.

Bloomberg economists see the global economy at risk of recession if the conflict drags out and other countries also getting involved in the war that could push oil prices to near $150 per barrel.

However, IMF chief economist Pierre-Olivier Gourinchas painted a milder picture, saying sustained increase in energy prices due to the Israel-Gaza war could affect global economic growth.

“The work we have done at the research department at the fund suggests that if there is something like a 10 per cent increase in oil prices, this would weigh down on global output by 0.15 per cent in the following year and will increase global inflation by 0.4 per cent,” he told a media briefing.

“We see often in situations where there is geopolitical instability in the region … we see spikes in energy prices, in oil prices. We have seen that in the previous crises and conflicts. This reflects the potential risk that there could be of disruption in transportation or production of oil in the region.”

He added, however, that it is too early to make assessments.

Oil prices shot up 5 per cent on Monday, the first day of trading after the war broke out. Brent, the benchmark for two thirds of the world’s oil, settled 5.69 per cent higher at $90.89 a barrel on Friday. West Texas Intermediate, the gauge that tracks US crude, closed up 5.77 per cent at $87.69 a barrel.

“You don't want oil prices to go up because of war. You want to go up because of demand,” Sunil Kaushal, chief executive of Standard Chartered Africa and Middle East region, told The National.

“So, we hope this [conflict] is short lived, and we get back to the fundamentals.”

The impact on Middle East and North African economies is expected to be larger than that on the global economy, with Israeli Prime Minister Benjamin Netanyahu already having warned of a “long war”.

With Israel's ground forces massing on the Gaza border and the country demanding the exodus of 1.1 million Palestinians from the Hamas-controlled territory, it does not look like the conflict will end soon.

Jihad Azour, Director of the IMF’s Middle East and Central Asia Department, said there would “no doubt” be an impact on Mena, but did not quantify the magnitude at the press briefing to launch the fund's Middle East and Central Asia economic outlook.

Growth in the region is set to decelerate sharply this year, with Mena's gross domestic product expanding at 2 per cent in 2023, after growing 5.6 per cent a year earlier.

Economists, most certainly, need more clarity on the intensity as well as the length of the war and whether this conflict will turn into a bigger refugee crisis for neighbouring countries before they make assessments on the economic fallout.

However, there could be a “significant balance of payments impact if the war continues”, said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“Also, if there's a marked increase in oil price this will impact the import bill of the oil importers of the region and also add to inflationary pressures.”

Another area that may bear the brunt of the situation is tourism.

“With fewer tourists visiting the region, especially if the conflict continues and escalates, a number of countries could be impacted, including Egypt,” she added.

The turn of events in the Middle East over the past few days has underpinned “just how fragile the situation remains in that part of the world”, said Daniel Murray, deputy chief investment officer and head of research at EFG Asset Management.

It is, however, very difficult to “draw strong consistent messages about the likely influence on financial markets”, he said.

“This is true for geopolitical events as a whole: because of the individuality of each event the consequences are very hard to predict.”

He added that the human cost of the conflict is “both sad and terrible” but the financial and economic spillover effects seem contained at the moment.