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Economic advisory group suggests Middle East escalation would pose mild recession risk

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07 Dec 2023 01:12:26 GMT9
07 Dec 2023 01:12:26 GMT9

Arab News Japan

TOKYO: Economic advisory group Oxford Economics says that the global economy would be strongly affected should the war between Israel and Hamas disrupt the global supply of oil.

However, it adds that even if oil reached $150 per barrel, if the disruption was only over the short term “any global recession would be mild and fleeting.”

Oxford Economics modelled two Middle East escalation scenarios. One assumed a substantial energy supply disruption – double that of a moderate disruption – in which oil prices spike to $150, stocks drop 12 percent and central banks tighten policy due to higher inflation.

The anticipated disruption to oil supply was predicted to be significant by historical standards – approaching the scale seen in the aftermath of the Yom Kippur War 50 years ago – but predicted that the subsequent rise in oil prices and accompanying financial market reaction would be notably less marked.

It predicted a significant slowdown in global growth in the event of a major escalation of the conflict in the Middle East. However, the pace of expansion would dip only marginally below the pace of population growth – a common definition of global recession. For 2024, global growth would amount to 1.1 percent, 0.8 points below the baseline forecast.

The report stated: “Despite rising concerns over the risk from an escalation of the Israel-Hamas war, businesses continue to see little chance of severe economic weakness in the year ahead. The relatively limited reaction of financial markets to recent developments in the Middle East suggests that investors agree.”

In the baseline forecast, it was assumed that the Israel-Hamas conflict would not trigger a more widespread regional conflict. In the severe scenario, energy market disruption would be substantial, consistent with, for example, an outbreak of hostilities between Israel and Iran.

The group predicted global oil supply contracting by around 6 percent, oil prices rising to $150 in Q1 2024, and stock markets falling 12 percent below the baseline.

In the “moderate” scenario, supply disruption would be around half of that of the severe scenario. Global oil supply would fall by almost 3 percent and oil prices could rise to $120. Stock markets would drop 6 percent globally.

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