The Israel-Hamas Conflict has not yet had an immediate impact on global shipping. However, if the conflict persists, it may start to affect ocean freight rates. Syed Mohammad Arif, chairman of the Bangladesh Shipping Agents’ Association (BSAA), emphasized this possibility in a recent interview.
The attacks by Israel on Gaza have resulted in significant casualties among Palestinians, primarily civilians, with over 4,100 reported killed and thousands injured.
You can also read: Geopolitical Tensions Could Hit Global Economy
Conflict affects vital trade routes
Recent reports indicate congestion and a backlog of cargo at Israeli ports, including Haifa and Ashdod, along with the closure of smaller ports in the Gaza enclave. If the conflict extends beyond Israel and Gaza and becomes prolonged, it could pose risks to crucial shipping chokepoints in the Middle East.
These chokepoints include the Suez Canal in Egypt, a vital trade route connecting Europe, the Middle East, and Asia, as well as the Strait of Hormuz between Oman and Iran. This Strait of Hormuz is the only waterway allowing oil transport from the Gulf region to the Indian Ocean and beyond.
Disruptions in the Suez Canal would force ships to take longer routes around Africa, increasing shipping costs, particularly from Europe to Asia, including Singapore.
Chairman Arif of BSAA also noted that global shipping freight rates have declined due to reduced demand amid a global Economic slowdown following the initial surge after the Covid-19 lockdowns. While this has benefited Bangladesh’s exporters and importers by reducing shipment costs, local factories face challenges due to a shortage of dollars. This limits their ability to import the necessary goods for production, particularly affecting small factories.
Despite the drop in shipping rates, prices of imported commodities in the domestic market have not seen a corresponding decline, highlighting ongoing challenges in the supply chain.
Clash may cost the world a trillion dollars
A potential direct confrontation between Israel and Iran could have dire global consequences. Economists predict that Oil Prices might surge to $150 per barrel, plunging global growth to 1.7% and triggering a recession with an estimated $1 trillion loss in world output. The Middle East’s significance as an energy supplier and shipping passage amplifies the global impact of conflicts, as seen in the 1973 Arab-Israeli war, which led to an oil embargo and stagflation.
The rising death toll in the recent conflict raises alarm bells. A possible scenario involves stricter US sanctions on Iranian oil, potentially causing a $3 to $4 oil price increase. The global economy’s response might be moderate if Saudi Arabia and the UAE can compensate with their spare capacity.
Treasury Secretary Janet Yellen has noted that major economic ripple effects aren’t evident yet, stressing the importance of preventing the conflict from spreading. However, should the conflict expand beyond its current borders, involving Lebanon and Syria, and escalating into a proxy war between Iran and Israel, the economic costs could significantly intensify.
Economic fallout looms
Yair Golan, the former deputy chief of staff for the Israeli military, notes that Iran and Hezbollah are closely monitoring the situation. If Hezbollah joins the campaign, this escalation could occur after the beginning of a ground operation in Gaza.
Should such an escalation happen, the likelihood of a direct conflict between Israel and Iran would rise, likely leading to higher oil prices. In the short but intense Israel-Hezbollah war of 2006, crude oil prices increased by $5 per barrel. In a comparable scenario today, this could result in a 10% price increase, bringing it to approximately $94.
Additionally, tensions could rise in the wider region, with countries like Egypt, Lebanon, and Tunisia facing economic and political stagnation. Israel’s response to the Hamas attack has already triggered protests in various regional countries, and such protests can quickly escalate to significant unrest. This raises the possibility of a repeat of the Arab Spring, a wave of protests and rebellions that toppled governments in the early 2010s.
The global economic impact in this scenario results from two major shocks: a 10% surge in oil prices and a risk-averse shift in financial markets similar to what occurred during the Arab Spring. This latter shift is captured by an eight-point increase in the VIX index, a widely used measure of risk aversion.
Together, these shocks would contribute to a 0.3 percentage-point drag on global growth in the following year, equating to approximately $300 billion in lost output and a slowing pace of growth to 2.4%. This would be one of the weakest growth rates in three decades, aside from the 2020 COVID crisis and the global recession of 2009.
Higher oil prices would also add about 0.2 percentage points to global inflation, maintaining it near 6%. This would exert pressure on central bankers to uphold tight monetary policies even as economic growth disappoints.
The Israel-Iran flashpoint
Direct conflict between Iran and Israel is a low probability scenario, but a dangerous one. It could potentially serve as the trigger for a global recession. The combination of soaring oil prices and a plummet in risk assets would deliver a substantial blow to economic growth, while also pushing inflation to higher levels.
Hasan Alhasan, a research fellow at the International Institute for Strategic Studies, emphasizes that no one in the region, including Iran, desires to witness the Hamas-Israel conflict escalate into a full-scale regional war. However, with emotions running high, the possibility of miscalculation is significant.
Israel has long perceived Iran’s nuclear ambitions as an existential threat. Tehran’s efforts to establish a military alliance with Russia, restore diplomatic ties with Saudi Arabia, and improve relations with the United States have added to the unease.
In the event of an Israel-Iran confrontation, Tehran is likely to activate its extensive network of proxies and partners in Syria, Iraq, Yemen, and Bahrain. This would present a long list of both hard and soft Western targets in the region to choose from.
Furthermore, heightened tensions between superpowers would exacerbate the volatile situation. The United States is a close ally of Israel, while China and Russia have been strengthening their ties with Iran. Western officials express concern that China and Russia could exploit the conflict to divert attention and military resources from other parts of the world.
According to forcasts, if these events were to transpire, it predicts a 1 percentage point drop in global growth, which would bring the number for 2024 down to 1.7%. While defining world recessions can be complex, a growth rate of 1.7% would meet the criteria. Excluding the shocks from the COVID pandemic and the global financial crisis, it would also represent the weakest growth since 1982, a period during which the Fed raised interest rates to combat the inflation stemming from the oil shock of the 1970s.
An oil shock of this magnitude would also disrupt the global effort to control prices, leaving global inflation at 6.7% the following year. In the United States, the Fed’s 2% target would remain out of reach, and expensive gasoline could present a challenge for President Joe Biden’s re-election campaign.
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