On the 7^th October 2023, an ongoing armed conflict between Israel and Hamas escalated significantly as a result of a ferocious and unprecedented attack on Israel. For historical context, this is not the first conflict that has arisen between these two groups: since 1948 there has been unrest within the region. The cyclical nature of this conflict poses a great threat to the economies of both Israel and Palestine; we can confirm this hypothesis by reflecting on the impacts of previous wars within the region. However brutal and bloody the conflict, there are also potential global geopolitical consequences as the U.S., Russia and Iran all have vested interests in the region.

Possible threats to the Israeli economy can already been seen just over a week into the most recent wave of the conflict.  Infrastructure damage has been devastating thus far, likely having a vast negative effect on the Israeli capital stock. Additionally, the loss of human capital has been significant due to a number of injuries and deaths eliminating many from the labour force. The decrease in the quantity and quality of Israeli factors of production can already be seen, which will likely slow down the rate of economic growth. Previous conflicts may offer us valuable insights into potential expectations for the Israeli economy in the coming months.

The graph above illustrates the growth in GDP of Israel between the years of 2005 and 2016. Interestingly, it is no coincidence that the only two year-on-year decreases, taking place between 2008 and 2009(-5.6%), and 2011 and 2012(-3.4%), correspond with times of unrest within the region, exemplified by the 2008 Gaza war and 2012 Israeli operation in the Gaza Strip. These past events clearly suggest a potential threat to the current economic growth of Israel due to the conflict.

Additionally, the Israeli government is faced with the challenge of how to best allocate its spending. Should it focus on its military, with a stress on arms defence? Or should it dedicate its government spending to welfare payments given the sheer increase in the number of citizens that will claim benefits? It is likely that the former will be favoured potentially resulting in a serious neglection of many Israelis and their welfare. Furthermore, an increase in government spending on arms will likely encourage many to offer their service in the army due to the upgraded military and, as a result, further decrease the size of the Israeli human capital available to add to the economy.

Nevertheless, the same applies to the Palestinian Authority concerning the economic strain they are being faced with. High levels of infrastructure damage are also a threat to Palestinians as their levels of human capital continue to decrease. However, there is one main distinction between the situation faced by both of the states: the levels of humanitarian aid received from foreign nations. Israel have historically had a strong alliance with the US, and they have already been receiving foreign support from the West since the outbreak of the conflict on the 7^th October. In fact, Israel is the largest cumulative recipient of US foreign aid, aggregating at a whopping US$150 billion in direct assistance. Unfortunately for the Palestinians, they do not have the luxury of Western support and financial backing. This is due to their perceived political image, as minority groups such as Hamas and the Popular Front for the Liberation of Palestine have committed atrocious terrorist attacks that have created a negative global image of the entire population. Thus, Palestine may find itself on a longer road to recovery due to its lesser financial support.

However, what makes this conflict so significant is the possibility it has to spread outside the region. This may result in serious geopolitical concerns that may have to be dealt with by neighbouring countries, with the most worrying of these being the distribution of oil.  Many of the globe’s most affluent nations, with the US in particular, are extremely reliant on the Middle East due to their frequent importing of oil from the region. On average, the US import 1.25 million barrels per day from the OPEC countries, representing 15% of their total oil imports. Hence, the spreading of this conflict into neighbouring Middle Eastern states could be truly detrimental to the US and other major importers. Iran, home to the highly important Straits of Hormuz, has formed an alliance with Hamas. The significance of the Straits must not be understated as over 20% of the world’s oil originates from here. Therefore, Iran finds themselves in a position of great power as their ability to potentially close the Straits as a political weapon could result in global turmoil over the price of oil.

Additionally, historical patterns show a sustained increase in oil prices coinciding with high levels of conflict. 50 years ago, the 1973 Yom Kippur War led to an oil embargo by the Arab states, who protested against American support for Israel in the war. Consequentially, oil prices vastly increased over the following three months, as shown by the graph, and remained at elevated levels even after the resolution of the war. Prices of up to $140 per barrel (adjusted for inflation) were reached- over double the original price before the conflict (roughly $60). This illustrates the potential geopolitical threats on the West if the conflict spreads.

Additionally, being the only country aside from Israel that borders the Gaza Strip, Egypt plays a significant role in the conflict and could potentially face economic consequences as a result of it. Proposals have been made by Arab neighbours, specifically Saudi Arabia and Qatar, for Egypt to accept hundreds of thousands of Gazans through the Rafah Gate. This favour would serve as a repayment of debt, given that Egypt has borrowed billions from these two nations in the past. Whilst it may seem that this would benefit the Egyptian economy, with them being let off the hook for billions in borrowing, there may be negative impacts of this deal. In Jordan and Lebanon, which took hundreds of thousands of refugees from Palestine in the 1940s and Syria in the 2010s, refugee influx has since become a painful political issue. The concern for Egypt is that these refugees, who will require housing, health care, and education, may choose to remain in the country given the instability back home. Egypt’s already struggling economy will simply not be able to cope funding the potential addition of hundreds of thousands of refugees, and could therefore suffer.

Ultimately, the Israel-Palestine conflict will likely result in serious economic consequences for both Israel and the Palestinian Authority. With that being said, the conflict’s potential to broaden is a much greater concern. Not only could the global economy be faced with a jeopardization of trade, with a possibility of serious shortages of oil, but also the potential of a geopolitical clash.