Middle East escalation would pose mild recession risk

Our latest scenario analysis suggests that the global economy would falter in the event of an escalation of the Israel-Hamas war that severely disrupted the global supply of oil. But assuming the disruption was not protracted, we think any global recession would be mild and fleeting even if oil prices reached $150pb.

What you will learn:

• We modelled two Middle East escalation scenarios. Our severe scenario assumes substantial energy supply disruption – double that experienced in the moderate scenario. Oil prices spike to $150pb, stocks drop 12%, and central banks tighten policy due to higher near-term inflation. This contrasts with our baseline in which the Israel-Hamas conflict does not trigger a widespread regional conflict and the impact on oil prices is relatively limited.
• Our modelling takes into account the global economy’s reduced vulnerability to oil market disruption compared with previous episodes when supply was heavily squeezed. While the disruption to oil supply is significant by historical standards in our scenarios – approaching the scale seen in the aftermath of the Yom Kippur War fifty years ago in our severe scenario – the subsequent rise in oil prices and accompanying financial market reaction is notably less marked.
• Overall, our modelling points to 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. Over the full 2024, global growth would amount to 1.1%, 0.8ppts below our baseline forecast.