The Israeli-Hamas War has not occurred in a vacuum. How do we assess the implications of this tragic development for the global economy?
We are at a pivotal moment in the post-World War II era. A US-led globalization into a unipolar world is now fragmenting into the de-globalization of a multipolar world. Two superpowers—the United States and China—are in the unmistakable grips of major conflict; since 2018, this has taken the form of a trade war, a tech war, and the early skirmishes of a new cold war. Moreover, the Russian Federation, as a has-been superpower from its USSR days, has re-emerged as a major source of geopolitical instability; not only has this been manifested in the form of Russia’s illegal aggression in Ukraine but also through Russia’s long-standing role as the principal sponsor of Hamas and other Middle East terrorist organizations such as Hezbollah and the Houthis.
Iran is the lightening rod in the Middle East. Through Hamas, it is effectively waging a proxy war against Israel. If the conflict between Hamas and Israel broadens into a wider conflict with Lebanon and Syria—a big “if” to be sure but a possibility that can hardly be dismissed—then there is good reason to fear collateral involvement with Iran. Vladimir Putin, who is struggling in Ukraine, would like nothing more than to see the Hamas-Israeli conflict morph into a broader war between Israel and Iran. That would undoubtedly bring the United States, Israel’s strongest ally, into direct conflict with Iran. US President Joe Biden’s tough pro-Israel speech of October 10, along with deployment of significant US naval assets in the East Mediterranean, leaves little doubt of that possibility, especially if hard evidence were to emerge of Iran’s active role in the Hamas attack on Israel.
All of this could play into the instability that has gripped domestic politics in the United States, where open-ended support of Ukraine has now become an increasingly contentious political issue in Washington. Vladimir Putin, of course, would be delighted if conflict with Iran deflects energy away from America’s commitment to Ukraine. Xi Jinping would also welcome a US that gets sidetracked from its fixation on China. Bottom line: The terrorism of Hamas elevates Iran to the role as the greatest wild card in a fragmented, unstable world.
Nor are these potential complications without consequences for the world economy, especially in the context of the IMF’s recent downgrading of its global growth prognosis. While the recent downward revision to the IMF’s World Economic outlook is small—a lowering of 2024 global growth prospects by 0.1 percentage point to 2.9 percent—this is still a relatively weak baseline trajectory that sends an important message: The average global growth forecast of 3% for 2024 to 2028 is the weakest five-year ahead global growth projection since the early 1990s; it is well short of the post-1960 trend of 3.5 percent and even further below the more recent 3.8 percent trend from 2000 to 2019.
This points to the inescapable conclusion that the risk of global recession is rising. A sub-par global growth prognosis puts the world near its “stall-speed,” lacking the cushion of resilience that could ward off the impacts of shocks. And there are plenty of shocks in the air. The trifecta of geostrategic shocks—two hot wars (Ukraine and Israel) and a cold war (US-China)—in conjunction with the lagged impacts of anti-inflation monetary tightening and associated sharp increases in long-term real interest rates in the developed world—could well be sufficient to push a weak global economy into recession in 2024. That would be all the more likely if the Israeli-Hamas war widens into a broader pan-regional conflict with Iran as noted above.
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