The Israel-Hamas war could have a significant impact on economic growth and inflation in the Eurozone, according to Goldman Sachs. Concerns are growing among economists that the conflict could spill over and engulf the Middle East, with Israel and Lebanon exchanging missiles as Israel continues to bombard Gaza, resulting in massive civilian casualties and a deepening humanitarian crisis. Despite limited economic exposure to the Middle East, European economies could be affected lower regional trade, tighter financial conditions, higher energy prices, and lower consumer confidence.
Europe Economics Analyst Katya Vashkinskaya highlights that tighter financial conditions could weigh on growth, exacerbating the existing drag on economic activity from higher interest rates in the Eurozone and the U.K. However, Goldman Sachs does not see a clear pattern between financial conditions and previous episodes of tension in the Middle East.
The most impactful way tensions could spill over into the European economy is through oil and gas markets. Vashkinskaya notes that commodities markets have seen increased volatility since the conflict broke out, with Brent crude oil and European natural gas prices up around 9% and 34%, respectively. Goldman’s commodities team has assessed downside scenarios in which oil prices could rise between 5% and 20% above the baseline, depending on the severity of the oil supply shock. A persistent 10% oil price increase usually reduces Euro area real GDP about 0.2% after one year and boosts consumer prices almost 0.3pp over this time.
Gas price developments present a more acute challenge, driven a reduction in global LNG exports from Israeli gas fields. The current gas market is less able to respond to adverse supply shocks. While estimates point to a sizeable increase in European natural gas prices in case of a supply downside scenario, the policy response would buffer the disposable income hit and support firms.
Bank of England Governor Andrew Bailey acknowledges the potential risk to energy markets posed the conflict and its impact on inflation. Oil prices have been volatile since the attack, and the World Bank warns that crude oil prices could rise to more than $150 a barrel if the conflict escalates. General consumer confidence also poses a spillover channel, and the Eurozone experienced a substantial deterioration in the aftermath of Russia’s invasion of Ukraine. While historically the same effect has not been observed between Israel and Hamas, Goldman Sachs’ measure of conflict-related uncertainty reached record highs in October.
Overall, the Israel-Hamas war presents significant economic challenges for the Eurozone, including lower trade, tighter financial conditions, higher energy prices, and lower consumer confidence. The potential impact on oil and gas markets poses the most significant risk, with the potential for increased volatility and price spikes. However, the extent of the spillover effects remains uncertain, and the policy response will play a crucial role in mitigating the economic impact.