The global economy will enter a recession if the war in the wider Middle East region is extended, which will severely disrupt the global supply of oil, but if this disruption does not last long, the recession will be mild and short-lived, even if the crude oil prices reach $150 a barrel, according to analysis by Oxford Economics.
The basic scenario
In her analysis she has as base case scenario that the Israel-Hamas war will not lead to a wider regional conflict and therefore the impact on the price of oil will be limited.
Particularly, oil prices would be only $4 a barrel higher at the end of the first quarter of 2024 compared to the estimate before the Hamas attack on Israel, while the impact will be felt in the economies of the Middle East, which account for only 4% of global GDP. For other economies, the effects will be minimal.
Oxford Economics acknowledges, however, that concerns have grown over a potential escalation of war in the region. In the first wave of a global risk survey conducted in the first 10 days after the Hamas attack, less than a third of businesses said they saw developments in the Middle East as a very important risk to the global economy over the next two years, but this figure rose to almost 60% in the second wave of the survey.
The alternative scenarios
Thus, the think-tank made parametric calculations in the case of two scenarios of war escalation. The more negative scenario predicts a decrease in global oil supply by around 6% which would lead to prices surge to $150, shares fall 12% and in further policy tightening by major central banks due to the short-term increase in inflation.
The a more moderate scenario predicts that supply would fall by 3% and crude prices would rise to $120.
Both of these scenarios take into account the less dependence on the global economy from oil market disruptions relative to past crises and shorter duration of higher prices, including due to less energy intensive production in recent decades, greater diversification of oil producers and strategic reserves.
It thus estimates that oil prices will quickly hit a ceiling, 60% higher than the baseline forecast in the very negative scenario and 30% in the moderate scenario.
How much will the global economy slow down?
The slowdown of the global economy will be significant in the event of a major escalation of the war in the Middle East. Global growth is forecast to moderate to 1.1% in 2024, or 0.8 percentage points lower than the base scenario forecast, while in the moderate scenario it will decrease by 0.4 pp.
However, even in the most negative scenario global growth will be only marginally lower than the rate of world population growth, which is the usual definition of a global recession. As the disruption in the energy market is limited and increases in oil prices are reversed, financial markets will recover quickly in tandem with a recovery in business and household confidence.
Oxford Economics notes that the results of her analysis appear to be consistent with investors’ business perceptions. Despite growing concerns about the risk of an escalation in the Israel-Hamas war, businesses continue to see no significant chance of a major economic slowdown next year, and markets’ relatively limited reaction to the latest developments in the Middle East suggest investors agree.
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