The International Monetary Fund (IMF) and the World Bank predict in their October 2023 outlooks for the Middle East and North Africa region that the region’s annual economic growth will sharply decelerate in 2023, to 2% from nearly 6% in 2022, due to reductions in oil production in some Gulf Cooperation Council countries to prevent further drops in oil prices.
According to both organisations, GDP growth in 2024 will only reach 3.5%, largely due to non-oil economic activity, and will still be well below 2022 levels.
Tough Days Ahead
The Gaza War has severely lowered the region’s economic prospects for 2024 and is hurting growth and financial conditions in several countries. A recent note from IMF staff stated that the Fund is cutting its growth estimate for the Middle East and North Africa (MENA) and that a protracted conflict, most likely involving multiple nations, would likely pose a significant economic burden for the area as a whole in 2024 and beyond.
The economies of Israel, the West Bank, Gaza, and other nations and areas directly involved in the conflict are already suffering greatly. According to a recent UNDP estimate, if the violence continues for three months, the West Bank and Gaza’s combined GDP is expected to decline by more than 12%, and the proportion of people living in poverty may increase by 45%.
Over 17,000 people have been murdered, three-quarters of Gaza’s population has been forced to flee their homes, and half of the city’s housing has been destroyed. As a result, the whole population of Gaza is suffering a humanitarian crisis, and the economic impact on the region is probably already greater than a 50% decrease in GDP.
According to the Organisation for Economic Co-operation and Development (OECD), Israel’s growth is expected to slow down a little if the conflict does not spread to a regional level. This is primarily due to drops in private consumption, investment, and tourism.
Before the conflict, the country’s growth was predicted to average 3.0% annually from 2023 to 2024; after the conflict, it was projected to average 2.3% in 2023 and 1.5% in 2024. Absent further escalation, it is anticipated that its robust economy before the conflict, sufficient fiscal and balance-of-payments buffers, and prompt policy response will avert more significant harm.
In Egypt, Jordan, and Lebanon, the tourist industry contributes 35–50% of export earnings and is a significant employer and source of foreign money. The war has severely damaged it, and it has also caused a slowdown in foreign direct investment and portfolio inflows due to rising levels of uncertainty, heightened perceptions of risk for individuals and companies, and tighter financial regulations.
If the conflict continues and gets worse, it will probably have a much bigger economic impact on all parties involved and go much beyond the current conflict region, cutting the pre-conflict economic growth estimates for 2024 by at least 4-5 percentage points.
What’s Next?
Compared to the early 1970s, the global economy is better positioned to withstand a significant shock to oil prices. However, if the Israel-Hamas conflict intensifies, one or more of the region’s producers may see a significant (if brief) decrease in their supply of gas and oil. The GDP of the region’s major producers of gas and oil might be severely impacted, with dire repercussions for the global economy, by a temporary closure of the Strait of Hormuz or the Suez Canal.
The supply of gas and oil may be cut temporarily, but even that could cause a significant spike in energy costs. These rises could force the world’s commodity markets into uncharted territory, especially in light of the interruptions to the energy and food supplies brought on by Russia’s invasion of Ukraine in 2022.
A disruption similar to the Arab oil embargo of 1973 may cut the world’s oil supply by as much as 6–8 million barrels per day, initially driving up prices by 56-75% (to USD 140-157 a barrel), according to the World Bank’s most recent commodity outlook.
The oil-heavy nature of the global economy has significantly decreased since the 1970s. Despite this, macroeconomic model simulations suggest that there might be a 0.1% drop in global growth and a 0.2% increase in worldwide inflation for every $10 per barrel increase in oil prices.
A major oil price shock brought on by the obstruction of important shipping routes, according to a recent OECD report, could cause trade flows to be disrupted and asset prices to fall globally.
This would turn the advanced economies’ anticipated “soft landing”—which is currently predicted to grow by 1.4% in 2024—into stagflation, which would result in falling output and rising inflation.