-Analysis-
A second war. A third shock. What is happening in Israel looks like the worst-case scenario feared by those who worry about the fate of the global economy. Will it be possible, once again, for the global economy to avert these potential new disruptions?
Over the past four years, two shocks have already shaken the globe. A pandemic has disrupted production, consumption, trade and supply chains. The offensive launched by Russia in Ukraine — the first invasion in Europe since the Second World War — has disturbed the markets of two vital products, wheat and oil.
While completely different in nature, the two shocks had the same effect on inflation. They have caused prices to soar in developed countries like never before in forty years. Central banks responded by raising interest rates with impressive speed. In recent months, inflation seemed to slowly start on a downward trend.
A likely crisis
But this decline could be stopped. An essential marker of the economy is now threatened: prices, which have until now remained anchored by monetary policy despite the turmoil of recent years, risk being swept away in the storm.
A financial crisis seems even more likely now.
Of course, this is not the only threat for the global economy. On an over-indebted planet, a financial crisis seems even more likely now that the sudden rise in interest rates has weakened the entire structure. Over the past year, cracks have been heard everywhere, from California to China, to Switzerland and to the UK.
It would be surprising if this was the end of it. Individual savers could weaken banks by massively emptying their current accounts to look for slightly more profitable investments. Large hedge funds could be caught off guard. The turnaround of the real estate market will also cause damage. Some emerging countries are struggling to meet their financial commitments while developed nations’ public finances are on the edge of a cliff.
Depressive effects on prices
But in almost all cases, financial crises have a depressive effect on prices. American economist Irving Fisher explained this in an article 90 years ago, “The Debt-Deflation Theory of Great Depressions.”
By triggering the most devastating terrorist attack since 9/11, Hamas could, on the contrary, revive inflation. The current events in the Middle East strangely echo those of 1973: it all began with an offensive on Israel, during a religious holiday, unbeknownst to the country’s powerful secret services. Then, the Israeli army retaliated violently.
The rest of the story will inevitably be different. Fifty years ago, on the weekend of Oct. 16 and 17, Arab oil-producing countries meeting in Kuwait declared they would impose a 70% increase in oil prices and a reduction in deliveries as long as the rights of Palestinians would not be recognized by Western countries. They agreed on a new increase two months later.
Today, oil prices are largely determined by market forces. Egypt had attacked Israel in 1973 but the two countries have since normalized their relations, and Israel has initiated a similar process with Saudi Arabia.
But the outcome of disasters is often difficult to predict. In Feb. 2020, when China was facing a mysterious coronavirus, France’s Minister of the Economy Bruno Le Maire announced that the epidemic would slash the country’s growth by 0.1%. A month later, the day France went into lockdown, he predicted a decline in production of 1%. A week later, he spoke of the most severe recession since World War II.
An oil reservoir
There are many tensions surrounding Israel. In the north of the country, exchanges of strikes are increasing with Hezbollah, which is based in Lebanon but supported by Iran. Saudi Arabia has suspended its negotiations with Israel and voices there are calling for greater support of Palestinians. Qatar intends to play the mediator but could also be subject to pressure. Iraq and Libya remain fragile.
The market was already tense before the attack carried out by Hamas.
Yet the region is also an oil reservoir. Last year, it accounted for 32% of global production and 41% of exports. The market was already tense before the attack carried out by Hamas. Even a limited fall in supply would cause the prices of black gold to soar in the long term.
Consumer price indexes would immediately start to rise again — inevitably triggering a new tightening of monetary policies. It would be challenging for developed economies to return to some precarious balance. The menacing shadow of this disastrous chain of events looms over the trading floor and was hanging over the recent meetings of the International Monetary Fund (IMF) and the World Bank in Marrakesh.
After the pandemic and the war launched by Russia, this third shock could have disastrous effects on weakened productive systems. But it is too early to lose hope. Indeed, what is striking in the incredible series of recent tragedies is the resistance — the “resilience” to use a fashionable word — of the economy. As if it was passing on all its woes on society.
