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Armored vehicles of the Israel Defense Forces (IDF) are seen during their ground operations in a location called Gaza, as the conflict between Israel and the Palestinian Islamist group Hamas continues, in this handout image released on November 1, 2023.
Israeli Defense Forces | Reuters
The war between Israel and Hamas could have a significant impact on economic growth and inflation in the eurozone unless pressure on energy prices is contained, they said. Goldman Sachs.
The ongoing hostilities could hit European economies through lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence, Europa Economics Analyst Katya Vashkinskaya pointed out in a research note on Wednesday.
Concerns are growing among economists that the conflict could engulf and engulf the Middle East, with Israel and Lebanon exchanging missiles as Israel continues to bomb Gaza, causing massive civilian casualties and a deepening humanitarian crisis.
While the tensions could impact European economic activity through lower trade with the Middle East, Vashkinskaya stressed that the continent’s exposure is limited as the eurozone exports around 0.4% of GDP to Israel and its neighbors, while the UK trade exposure is smaller. than 0.2% of GDP.
She noted that tighter financial conditions could weigh on growth and worsen existing drags on economic activity from higher interest rates in both the euro area and the United Kingdom. However, Goldman sees no clear pattern between financial conditions and previous periods of tension in the Middle East. East
The most important and potentially impactful way tensions could spill over into the European economy is through the oil and gas markets, Vashkinskaya said.
“Since the current conflict broke out, commodity markets have seen increased volatility, with Brent crude oil and European natural gas prices rising by around 9% and 34% respectively at their peak,” she said.
Goldman’s commodities team assessed a range of downside scenarios in which oil prices could rise between 5% and 20% above base levels, depending on the severity of the oil supply shock.
“A sustained 10% oil price increase typically reduces eurozone real GDP by around 0.2% after one year and increases consumer prices by almost 0.3 percentage points over that period, with similar effects in Great Britain Britain are observed,” said Vashkinskaya.
“For this effect to occur, however, oil prices must remain consistently high, which is already being called into question with Brent crude oil prices nearing pre-conflict levels at the end of October.”
Gas price developments pose a more acute problem, she said, because the price increase is caused by a reduction in global LNG (liquefied natural gas) exports from Israeli gas fields and the current gas market is less able to respond to adverse supply shocks.
“While our commodities team’s estimates point to a significant increase in European natural gas prices in the event of a downward supply scenario in the range of EUR 102-200/MWh, we believe that the policy response to continue or reinstate existing energy costs “The support policy could buffer affected disposable income and support businesses if such risks were to materialize,” Vashkinskaya said.
Bank of England Governor Andrew Bailey told CNBC on Thursday that the knock-on effects of the conflict on energy markets pose a potential risk to the central bank’s efforts to rein in inflation.
“So far I would say we haven’t seen a significant increase in energy prices, and that’s obviously good,” Bailey told CNBC’s Joumanna Bercetche. “But it is a risk. It is clearly a risk for the future.”
Oil prices have been volatile since Hamas launched its attack on Israel on October 7, and the World Bank warned in a quarterly update on Monday that crude oil prices could rise to more than $150 a barrel if the conflict escalates.
Overall consumer confidence is the last potential channel for spillovers, according to the Wall Street bank, and Vashkinskaya noted that the euro area has suffered a substantial deterioration in the wake of Russia’s invasion of Ukraine in March 2022.
Historically, the same effect has not been observed during outbreaks of heightened tensions between Israel and Hamas, but Goldman’s news-based measure of conflict-related uncertainty reached record highs in October.
