The escalating conflict between Israel and Gaza, which could escalate into a war in the region involving Iran, Hezbollah, is raising serious economic concerns among Lebanon, Israel and Iran.
Analysts expect severe consequences to befall these countries. Lebanon is expected to suffer most.
Lebanon is facing severe economic contraction
If the conflict spreads beyond its borders, Lebanon’s gross domestic product will likely shrink.
Nassib Gobril, the head of Byblos Bank’s group research, said that based on Israeli threats to destroy vast parts of Lebanon’s infrastructure and punish the Lebanese government, he forecasted a 10-15% contraction in the economy this year.
The Middle East is now facing a new wave of geopolitical risk following the deaths of Hamas leader Ismail Haniyeh, who was killed in Tehran, and Hezbollah Commander Fouad Shkr. Both were murdered in south Beirut.
The events in question have increased tensions. Iran’s Supreme Leader has threatened retaliation on Israel.
The impact on Lebanon’s economy and infrastructure
Naeem Alam, Chief Investment Officer at Zaye Capital Markets, says that Lebanon’s history is one of proxy conflicts and armed conflict, but the current state of its economy puts it in danger of “a complete collapse.”
A heightened military conflict between Israel & Hezbollah could further harm Lebanon’s economy, which is already in trouble.
It will be nothing like the impact in Palestine. Anyone who is currently looking at the scenario does not think this. This is going to remain very contained.
According to S&P Global Market Intelligence, in an escalation situation, possible targets for Hezbollah could be military assets located near key infrastructure, such as Beirut’s Rafic Hariri Airport, Beirut Seaport and smaller ports on the southern Lebanon coast.
Local media suggest that the country has suffered economic damages of $1.5 billion as a result of the conflict.
The financial crisis in Lebanon has been one of the most severe since the middle 19th century. Over $70 billion have been lost by the banking industry, and the currency is down more than 90 percent since 2019.
Iran’s economic ramifications
Iran is at threat, too, as it has faced military conflict with Israel.
As President Pezeshkian tries to reach out to the West, and ease sanctions crippling Iran’s economy, his efforts are complicated by Hamas leader Ismail Haniyeh’s death in Tehran.
Tehran’s retaliation towards Israel could hamper its efforts to increase investment in areas like renewable energy, oil and gas and infrastructure. Iran’s GDP reached 4.7% in 2014, despite the sanctions.
According to the International Monetary Fund, however, this growth will slow down to 3,3% in 2019 and to 3.1% by 2025.
Israel’s Economy Under Pressure
Israel’s economy has grown slower since the Hamas-led attacks on October 7, which led to 1,200 Israelis being killed and 240 kidnapped.
Nearly 40,000 Palestinians have been killed by Israeli attacks in Gaza.
Israel’s economy is in trouble. It is expected to grow 1.5% by 2024, and then 4.2% by 2025.
Bank of Israel has downgraded its growth forecast due to war impact. The conflict is estimated at 255 billion shekels, or about 13% of 2024’s projected GDP.
The increase in defense spending, as well as the decrease in tax revenues.
Regional implications
Escalation of the conflict could have a negative impact on tourism, shipping and oil. Travel advisories have been issued by several countries against Israel, Lebanon and the bordering Jordanian and Egyptian territories. Air Algerie has suspended all flights from and to Lebanon. This highlights the vulnerability of tourism.
S&P estimates that tourism, which accounts for between 12% and 26% of the current account revenues for Lebanon, Jordan and Egypt, may lose up to $16.1 billion due to conflict.
Conflict also poses a threat to global shipping routes. Yemen’s Houthi armed group has promised to increase its offensive in the Red Sea – a crucial trade route.
Jack Kennedy, S&P Global Market Intelligence’s head of MENA Country Risk, warned that Houthi strikes could intensify, causing major disruptions to the commercial shipping industry and naval forces.
Global economic impact of rising oil prices
Iran’s involvement directly in the conflict may lead to an increase in oil price and market volatility that could impact the global economy.
According to Aslam, an increase in the global crude price would reignite inflation fears.
Investor confidence, as well as various sectors around the world are affected by this global economic threat. Repercussions of the conflict highlight how geopolitical health and economic stability are interconnected.
This article What could a full-blown Iran/Israel war mean for the Middle East’s economy? This post What a full-blown Iran-Israel war could mean for the Middle East economy?
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