It’s one year since Hamas’ October 7 attack on Israel’s border communities. It’s also one year since Israel’s lethal invasion of Gaza. Both have been commemorated worldwide in different ways. The common thread is recognition of the horrific toll it has taken so far. Gaza has been flattened beyond recognition. Hamas killed 1,200 while the Israelis have killed over 40,000 Palestinian civilians, mostly women and children. And we are still nowhere near a ceasefire.
Three months into the war last year, we had speculated in these columns on the cost of a widening West Asia conflict. The one-year milestone is indeed worse than anyone had imagined. The Gaza conflict first spilt over to the occupied West Bank; then followed the assassinations of Hamas and Hezbollah leaders, and now we are in the middle of Israel’s invasion of Lebanon.
Even as we write this, the world Is bracing for a possible Israeli attack on Iran in retaliation to the barrage of ballistic missiles Iran had let loose after the assassination of Hezbollah chief Hassan Nasrullah. The circle of conflict is expanding by the day.
The toll so far
Beyond the human deaths and suffering, Gaza’s economy has been bombed back to the stone age. A comprehensive UN Trade and Development (UNCTAD) report of early 2024 said between 80% and 96% of Gaza’s agricultural assets – including irrigation systems, livestock farms, and orchards – had been decimated, crippling the region’s food production and worsening already high levels of food insecurity. As much as 82% of private businesses, a key driver of Gaza’s economy, are damaged or destroyed.
For Israel too it has been a crippling war, though nowhere near what the Palestinians have suffered. Israel’s economy is experiencing the sharpest slowdown among the developed OECD countries. Its GDP contracted by 4.1% in the weeks after October 7, and the downturn continued into 2024, falling by an additional 1.1% and 1.4% in the first two quarters.
With the fighting intensifying after the invasion of South Lebanon, the Bank of Israel has estimated the cost of the war will reach USD 67 bn by 2025 – a huge deficit to cover even after a USD 14.5 bn military age package from the US.
For the region, the one year of war has meant plummeting GDP growth and a slowdown in investments. In its mid-April assessment of the region, the IMF has warned the Middle East, north Africa and Pakistan GDP growth will be a ‘lacklustre’ 2.6% in 2024, down from 3.3% in its previous forecast.
There has been a major disruption of maritime trade routes due to the persistent attacks by the Houthi rebels on commercial shipping in the Red Sea. Traffic through the Suez Canal—a significant source of revenue for Egypt—has been reduced to a trickle as ships are taking the longer route via the Cape of Good Hope.
Trigger happy
Strangely, as the circle of conflict expands drawing in Iran, there is quiet confidence among Western bankers that the impact of the war will be limited, and that diplomacy will ensure it doesn’t become a multi-national conflagration.
After Iran’s missile barrage on Israel, there was panic and oil prices rose 2% on concerns that oil supplies would be disrupted if Israel attacked Iran. However, crude prices have now fallen to USD 75/barrel, lower than USD 85/barrel when the conflict first broke a year ago. The perception is US inventories and OPEC’s spare capacity is enough to see the world through any short-term crisis.
There is quiet optimism too in Western financial capitals that inflation in both the US and Britain has receded and the jobs data is looking good.
This, however, does not factor in a trigger-happy Benjamin Netanyahu, bent on expanding the number of war fronts. The earlier opposition of the Biden administration to Israel invading Lebanon and attacking Iran seems to have evaporated. The current message of the US ally to Israel is: avoid oil and nuclear installations, but attacking military infrastructure is alright.
However, Netanyahu has said Iran’s nuclear facilities are not off limits. In response, Iran has promised massive retaliation should Israel attack. In this scenario if Israel bombs Iran’s Kharg Island oil hub, though which most of its exports pass, or a nuclear site, Iran in desperation may shut the Gulf of Hormuz, through which a quarter of all the world’s oil trade passes.
This will disrupt oil supplies in a big way and could push prices up to USD 130 / barrel triggering a major energy crisis. Meanwhile, there are reports Russia has been bombing American proxies in Syria, and this could spark a confrontation between US and Russian troops in Syria.
This is how the two sides are stacked. The Palestinians, Lebanon and Iran have all sued for a ceasefire. Even the Hezbollah, severely hurt after the numerous assassinations of its leaders, is calling for an end to hostilities without making a Gaza ceasefire a condition. Much of Europe, led by France is supporting this line.
On the other hand, Netanyahu, with tacit US support, is determined to widen the war. On the last occasion, he boasted Israel was fighting on seven fronts. If this goes on, the world will see bigger economic shocks as we enter the second year of the conflict.