As the conflict between Israel and Hamas approaches its fourth week, economist Mohamed El-Erian has warned that risks to the global economy are increasing.

News / Monday, 30 October 2023 14:49

The conflict escalated on Monday after Israeli military forces announced an expansion of their ground offensive in the Gaza Strip, continuing their campaign in response to attacks carried out on October 7th by the Hamas group.

El-Erian, Chief Economic Advisor at Allianz, stated that the longer the conflict persists, the greater the likelihood that it could escalate into a regional conflict with implications for global financial markets.

"The longer this conflict goes on, the greater the likelihood of escalation," El-Erian told CNBC correspondent Dan Murphy during a panel session at the AIM summit in Dubai. "The higher the risk of escalation, the higher the risk of contagion to the rest of the world from an economic and financial perspective," he continued.

El-Erian mentioned that this contagion would exacerbate the already prevalent problems facing the global economy, including stagnant growth, persistently high inflation, and broader market fragmentation. He emphasized that the conflict, in some sense, exacerbates all the pre-existing significant issues.

Initially, the impact on global markets in response to the outbreak of war was limited, as investors initially believed that the conflict had been contained. However, the prospect of regional escalation involving other players, such as Iran and Lebanon, has heightened market concerns.

The price of oil has been particularly volatile amid concerns that escalation could disrupt supplies from the resource-rich region. Oil prices rose on Friday after Israel announced the expansion of its ground operation but fell on Monday as investors awaited the Federal Reserve's monetary policy meeting.

Kristalina Georgieva, the head of the International Monetary Fund, called the escalation of the conflict between Israel and Hamas another cloud on the already gloomy economic horizon last Wednesday. She mentioned that it would have a negative impact on neighbors, trade channels, tourism, and insurance costs.

Responding to the question of what the ongoing conflict means for these ambitions, El-Erian suggested that the outlook has become simultaneously bleaker and more relevant. He noted that people are watching this with a sense of despair that he hasn't seen before and emphasized that it is a question that policymakers should indeed address.

El-Erian's comments echo remarks made last week by David Malpass, President of the World Bank, who told CNBC that the conflict has significantly complicated the task of regional cooperation in the Middle East. Malpass stated that "We were working on creating a more peaceful Middle East, and many of the countries in the region were talking to each other about moving forward on a new platform of coexistence. I think it will take some time for that to come together in one way or another."