Middle East conflict raises risks to global economic outlook

Conflict in the Middle East may create new risks to the global economic outlook, leaving central bankers facing renewed inflationary pressures even as they continue to deal with the economic fallout of the COVID pandemic and Russia’s invasion of Ukraine a year ago.

Iran-backed Hamas terrorists struck Israel over the weekend, killing at least 700 in the deadliest attacks the country has experienced in decades. Israel’s government has launched airstrikes on the Hamas-controlled Gaza Strip and is mobilizing military reservists in preparation for a response, while Hezbollah – an Iran-backed terror proxy based in Lebanon – has expressed support for Hamas and remains a threat on Israel’s northern border.

The prospect of broader conflict in the Middle East could add to the global instability sparked by Russia’s invasion of Ukraine nearly 20 months ago, disrupting supply chains and dragging down economic confidence around the world. 

The impact would depend on the duration and intensity of the conflict, as well as whether it spreads to other parts of the region – which is home to major oil producers like Iran and Saudi Arabia plus major shipping lanes that run through chokepoints at the Strait of Hormuz, Bab-el-Mandeb, and Suez Canal.