Israel-Hamas war: Where the conflict goes from here, and how it could affect the global economy

Back in 2005, the Israelis had chosen to voluntarily leave Gaza in accordance with a disengagement plan proposed by then Prime Minister Ariel Sharon, which was ultimately approved by the Knesset. Eighteen years later, analysts believe there is virtually no chance that Israel would want to step back into an administrative role in the volatile enclave of 2 million-plus Palestinians that it would have by then all but razed to the ground.

Israel’s after-war challenge: Cautionary notes from US

General David Petraeus, a former CIA director and the top US general in both Iraq and Afghanistan, told CBS News in an interview that the US had made mistakes in planning the post-conflict phase in the wake of its post 9/11 “war on terror” — and cautioned Israel against making similar mistakes in its “very challenging mission” in Gaza.

“There needs to be a vision for that (post conflict phase). I think that Prime Minister Netanyahu would be well advised to not only say what they’re going to try to do to Hamas, but realistically… also talk about the future of Gaza and a future, even a vision for the Palestinian people post-conflict…,” Petraeus, co-author of Conflict: The Evolution of Warfare from 1945 to Ukraine (2023), said.

Protesters gather at Grand Central Terminal during a rally calling for a ceasefire between Israel and Hamas on Friday, Oct. 27, 2023, in New York. (AP Photo/Jeenah Moon)

“We (the US) made mistakes and not sufficiently planned the post conflict phase. I was a two-star general at that time (during the post-9/11 US invasion of Iraq)… But clearly, we got to Baghdad, we toppled the regime, but our plans were not sufficient. And when we then compounded that situation by taking two policy decisions that were very destructive, frankly, that was to fire the Iraqi military without telling them what their future was, and (to remove Iraq’s civil servants) without an agreed reconciliation process, which led to thousands of bureaucrats we needed to run Iraq, being sent into retirement or…being fired,” Petraeus said.

“So clearly, it’s important to plan what will happen the day after, the so-called post conflict phase… There also should be a vision announced in advance of what it will be like for the Palestinians in Gaza, and also in the West Bank, after the destruction of Hamas and their terrorist partners, the Islamic Jihad”.

In separate comments made to Politico, Petraeus warned that the IDF’s plan of a bombing campaign followed by a major land invasion of the 140 square mile patch “could be Mogadishu on steroids very quickly” — an allusion to the two-day street battle that US forces fought with the Somali National Alliance (SNA) and armed citizens in Somalia’s capital city in October 1993, dramatised in the 2001 film Black Hawk Down.

Three scenarios for the global economy: bad, worse, worst

The aftermath of the military engagement could also have serious economic consequences for the region and the world, which continues to struggle to cope with the war in Ukraine and the inflationary aftereffects of the stimulus offered during the pandemic. At a time when central banks around the world are grappling with inflation reduction strategies, a spike in oil prices could upend calculations on growth-inflation dynamics.

While the impact is not expected to be as grave as during the last Arab-Israel war in 1973 and the subsequent oil embargo — given that the Arab world appears to be split, the US has considerable leverage over key players in the region, and the major global economies are far more closely interconnected — the situation could worsen if the war is prolonged and the Palestinian humanitarian crisis worsens.

As Israel continues its relentless bombardment of Gaza and with the Palestinian death toll already past 8,000, a Bloomberg report sketched three likely scenarios going forward: a limited conflict that is confined to the Gaza strip; a slightly more expanded conflict with the involvement of Iran-backed militants in Lebanon and Syria; and finally, a full-scale war between regional powers Israel and Iran that could suck in the US, with the possible involvement of the Chinese and the Russians.

This last scenario is the least likely at this point. Should it come to pass, however, the consequences for the global economy could be serious. More than 20% of the world’s crude supply comes from West Asia — and even though Saudi Arabia and the UAE, which are expected to have excess capacity, likely won’t side with Iran, shipments may not be able to pass through the Strait of Hormuz, the 48-km shipping choke point through which nearly a fifth of the total global oil production passes.

According to Bloomberg, a direct conflict between Iran and Israel — and an Iranian blockade of the Strait of Hormuz — could push crude prices above $150 per barrel. Global inflation could rise to about 6.7% next year as a consequence, and global growth could slow by almost 2 percentage points. A worldwide recession would be especially bad news for countries such as India and the US, where important elections will take place next year.

The second scenario of a regional conflict — with the involvement perhaps of Iran-backed Hezbollah in Lebanon and militias in Iraq and Syria, and also the Houthis in Yemen — oil prices could rise to around the mid-$90s, higher than the current $90 per barrel, Bloomberg estimates. The consequent higher inflation next year could dent global growth by 0.3 percentage points.

The most likely scenario, according to Bloomberg, of the conflict remaining confined to the Gaza Strip, will extract a terrible human toll, but the impact on the global economy will be limited. However, it is still bad news for a global economy just emerging from multiple shocks, with central banks walking the tightrope between raising interest rates to tackle runaway inflation and ensuring that slowing growth does not result in painful hard landings. Complicating the picture further are variables such as the slowing growth in China and the continuing war in Ukraine.