Economists worry that the conflict between Israel and Hamas could have an impact on European economies through reduced regional trade, more stringent financial circumstances, higher energy costs, and lower consumer assurance, as outlined by Goldman Sachs. Heightening fears is that the war might spread beyond the borders of Israel and Gaza, with Lebanon and Israel engaging in a missile exchange and the continuation of airstrikes by Israel in Gaza.
The ongoing conflict between Israel and Hamas has the potential to significantly impact economic growth and inflation in the euro area, depending on how energy prices fare, Goldman Sachs highlighted. Europe Economics Analyst Katya Vashkinskaya pointed out Wednesday that the tensions could, through means such as lower regional trade and tighter financial conditions, put downward pressure on European economies as well as the euro and British economies in particular. The risk is increasing of the conflict spreading to further regions of the Middle East, with Israel and Lebanon already trading missiles.Vashkinskaya noted that Europe's exposure to the Middle East is relatively limited when considering the 0.4% of GDP exported to Israel and its neighbors in the euro area, and the 0.2% of GDP for the U.K. Nevertheless, tightening financial conditions could place additional strain on existing economic activity due to higher interest rates in the euro area and Britain. The most pressing issue to be considered, however, is the potential for oil and gas market spillover from the Middle East.
"Since the current conflict broke out, commodities markets have seen heightened volatility, with Brent crude oil and European natural gas prices surging by around 9% and 34% at their peak respectively," she said. Goldman's commodities team explored a variety of potential downside scenarios in which oil prices could go up by as much as 5-20% higher than the baseline. "A 10% continuous oil price hike usually diminishes Euro area real GDP by 0.2% in a year and causes consumer prices to jump by almost 0.3 percentage points over the same period, while a similar phenomenon is observed in the U.K.," Vashkinskaya said. "It's uncertain if this downward pressure will remain in place, though, since the Brent crude oil price was nearly back at pre-conflict levels in late October." Regarding gas prices, Vashkinskaya mentioned that the hike is driven by diminished LNG (liquefied natural gas) exports from Israeli gas fields, which makes the market more vulnerable to supply shocks. "Our commodities team's forecasts suggest that European natural gas prices could vary between 102-200 EUR/MWh in a downside scenario. To minimize the hit to disposable incomes and support businesses, we suggest that policymakers continue or restore energy cost support policies," Vashkinskaya said.
Andrew Bailey, Governor of the Bank of England, told CNBC on Thursday that any knock-on impacts of the active conflict on energy markets could potentially thwart the central bank's endeavors to contain inflation. He described the current situation as “good”, as no sizeable rise in energy prices has been observed yet, though he still went on to say such a scenario cannot be ruled out. World Bank economists predicted that oil prices could surge to over $150 a barrel should the conflict further intensify. They also pointed to the fact that a drop in customer assurance is another possible consequence of the conflict, something that was noted following the Russian occupation of Ukraine in 2022. Although there is no such precedent in terms of the outcome of previous clashes between the two sides, Goldman Sachs said last month that their index of conflict-related uncertainty hit a record high in October.
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