The impending dark clouds of World War III and the financial armageddon of 2028: A study by TradeFxP

A wider war in the Middle East could tip the world economy into recession The Hamas attack and Israel’s response are taking a heavy human toll. A global economic downturn may follow.

admin

Oct 18, 2023 - 10:35

0 249

The impending dark clouds of World War III and the financial Armageddon of 2028: A study by TradeFxP

A broader conflict in the Middle East might send the global economy into a slump.

The Hamas attack and Israel's reaction are killing a large number of people. A worldwide economic slump is possible.

A broader conflict in the Middle East possesses the potential to thrust the global economy into turmoil. The recent attack by Hamas and Israel's subsequent response resulted in a significant loss of life. This has heightened concerns about the possibility of a global economic collapse.

The ongoing fighting between Israel and Hamas carries immense implications for the global economy should other nations become involved. The very real risk lies in Israel's preparations to enter Gaza in reaction to Hamas' attack. With hundreds already losing their lives due to this conflict and Israel conducting airstrikes on Gaza, there is potential for militias supportive of Hamas in Lebanon and Syria to join the fight.

An even more aggressive escalation could lead Israel into direct confrontation with Iran, which supplies weapons and financial support to Hamas, a designated terrorist organisation blacklisted by both the United States and the European Union. In such a scenario, Bloomberg Economics predicts that oil prices could surge to $150 per barrel while global GDP could plummet to 1.7%, resulting in an estimated $1 trillion decrease in global output.

It is important to note that, amidst this tragic human tragedy last week, secondary impacts are not of the utmost importance. The majority of casualties were civilians from both sides. Furthermore, several dozen Israeli hostages have been taken to Gaza, while Palestinians trapped in the enclave face the imminent danger of rockets and an impending ground invasion. The damage caused by this conflict is fuelling anger and increasing the probability of military escalation.

Conflict within the Middle East possesses the potential to send reverberations throughout the world, given that the region serves as a crucial source of oil and a major shipping route. A prime example is seen in the 1973 Arab-Israeli conflict, which resulted in an oil embargo and years of stagnant economic growth in developed nations. While other conflicts may have caused significant loss of life, their impact on a global scale has been comparatively lesser.

Presently, the world economy remains fragile as it continues to recover from inflation resulting from Russia's invasion of Ukraine last year. Another battle in an energy-producing region threatens to reignite inflation. This has repercussions that range from causing more unrest in the Arab world to having an impact on the United States' upcoming presidential election, where gasoline prices have a significant impact on voter sentiment.

There are three possible scenarios at play here. The first scenario involves hostilities remaining primarily confined to Gaza and Israel. In this case, the impact on oil prices and the global economy would be minimal—similar to what was observed during the 2014 ground assault on Gaza following Hamas' kidnapping and murder of three Israelis.

However, a likely outcome in this current crisis would be a repetition of that horrific event, coupled with stricter enforcement of U.S. sanctions on Iranian oil. Tehran had increased its oil production this year by approximately 700,000 barrels per day due to positive developments in its relations with the United States. Bloomberg Economics projects that if these barrels were removed due to U.S. pressure, oil prices could rise by $3 to $4.

The economic impact in such a scenario would be limited, especially if Saudi Arabia and the United Arab Emirates compensate for any loss of Iranian spare capacity.

Treasury Secretary Janet Yellen stated during an interview at the International Monetary Fund's annual meeting in Morocco that she currently sees no signs of any "major economic impact." Federal Reserve Chair Janet Yellen emphasised the criticality of preventing the conflict from escalating further.

The second scenario involves the conflict expanding to include neighbouring countries such as Lebanon and Syria, which house powerful Tehran-backed militias. This would transform the crisis into a proxy war between Israel and Iran, resulting in significant economic ramifications.

Hezbollah, a prominent political group and militia backed by Iran, has already engaged in a gun battle with Israeli soldiers on the border and claims to have launched guided missiles at an Israeli army base. Should the fighting spread to Lebanon and Syria, where Iran supports armed organisations, it would escalate into a proxy war between Iran and Israel. The economic consequences would be substantial.

"Iran and Hezbollah are watching and assessing the situation," says Yair Golan, former deputy chief of staff of the Israeli military. "If Hezbollah joins the campaign, it could happen after the start of a ground operation in Gaza."

Such an escalation would increase the likelihood of a direct clash between Israel and Iran and subsequently drive-up oil prices. During the intense but brief war between Israel and Hezbollah in 2006, crude oil prices rose by $5 per barrel. A similar event today would cause prices to increase by 10%, reaching approximately $94 per barrel, in addition to instilling shock due to a limited war scenario.

Tensions could also rise within surrounding areas. Egypt, Lebanon, and Tunisia are already grappling with economic and political instability. Protests have emerged in response to Israel's actions following Hamas' attack. The line between anti-Israel demonstrations and anti-government unrest within Arab nations is thin. A repetition of the Arab Spring—a series of protests and uprisings that toppled governments in various Arab countries during the early 2010s—is not out of the realm of possibility.

In this particular scenario, two major shocks—an increase of 10% in oil prices and a financial market de-risking similar to what occurred during the Arab Spring—would impact the global economy. An eight-point increase in the VIX index, a widely used indicator of risk aversion, would represent the latter move.

These shocks would result in a 0.3 percentage point decline in global GDP next year, translating to approximately $300 billion in lost output while reducing the growth rate to 2.4%. Excluding the COVID-19 crisis and the global financial crisis of 2009, this would be the slowest growth experienced in three decades.

Higher oil prices would also contribute around 0.2 percentage points to global inflation, keeping it at approximately 6% and placing pressure on central banks to maintain stringent monetary policies even if GDP falls short of expectations.

The third scenario involves a direct confrontation between Iran and Israel—a remote yet alarming possibility. Such a conflict has the potential to trigger a global recession, with rising oil prices and declining risk assets impacting the economy and fuelling inflation.

"No one in the region wants the conflict between Hamas and Israel to escalate into a full-scale regional war, not even Iran," says Hasan Alhasan, a research fellow at the International Institute for Strategic Studies. However, given the current situation, this does not mean it cannot occur. "The possibility of a mistake is high," adds Alhasan.

Israel has long viewed Iran's pursuit of nuclear weapons as an existential threat. Concerns have intensified due to Tehran's attempts to forge military alliances with Russia, restore diplomatic ties with Saudi Arabia, and normalise relations with the United States.

Statements from Israel and the United States regarding Iran's role in the Hamas attack have been conflicting. Israeli Strategic Affairs Minister Ron Dermer stated on October 9 that there were indications that Iran may have had knowledge of the attack. According to reports from the New York Times, American authorities have proof that the attack caught Iranian leaders off guard. However, they hold Iran responsible within a broader context due to its support and arming of Hamas.

In the event of a conflict between Israel and Iran, "Tehran would likely seek to activate its entire network of proxies and partners in Syria, Iraq, Yemen, and Bahrain," says Alhasan. "It would have a long list of hard and soft Western targets to choose from in the region."

Rising tensions among global superpowers would add another layer of complexity to this scenario. The United States staunchly supports Israel, while China and Russia strengthen their ties with Iran. Western officials are concerned that China and Russia may exploit the confrontation to divert attention and military resources away from other regions.

Given that the Gulf region supplies approximately one-fifth of the world's oil, prices would naturally rise in such a situation. Although an oil shock on par with the 1973 Arab embargo imposed in response to U.S. support for Israel during that year's conflict may not occur, there is still a possibility of oil prices surging, akin to what transpired after Iraq's invasion of Kuwait in 1990. This magnitude could drive oil prices above $150 per barrel at present.

If Iran were to block the Strait of Hormuz—through which daily flows one-fifth of the world's oil supplies—production reserves in Saudi Arabia and the United Arab Emirates may prove insufficient to mitigate the effects fully. Financial markets would also experience a more pronounced downward movement, potentially equivalent to the 16-point increase witnessed in the VIX during 1990.

Taking these factors into consideration, Bloomberg Economics predicts that global growth will decline by 1% should this scenario unfold, reducing the figure for 2024 to 1.7%. While accurately defining global recessions can be challenging given the rapid rise of economies like China, which makes outright contractions unusual, a growth rate of 1.7% would indeed meet the criteria. Excluding the shocks of the COVID-19 pandemic and the global financial crisis, this would represent the slowest growth since 1982, when the Federal Reserve raised interest rates to combat inflation resulting from the oil shock in the 1970s.

An oil shock of this magnitude would also undermine global efforts to control prices, causing global inflation to reach 6.7% next year. In the United States, it would be impossible to achieve the Federal Reserve's target of 2%, and high gasoline prices would pose challenges for President Joe Biden's re-election campaign.

While a darker path marked by a high death toll in Israel could lead to deadly retaliation and regional conflict, current circumstances lean more towards a limited conflict that carries a heavy human toll but has lesser economic and financial repercussions.

One thing remains certain: hopes for a more stable Middle East have been dashed. Recent reconciliations between Saudi Arabia and Iran, as well as peace agreements between Israel and other Arab nations (with Saudi Arabia expected to follow suit), had sparked optimism that decades of war in the region were coming to an end.

Instead, a new storm has emerged. The invasion of Ukraine by Russia, the trade war between the U.S. and China, and escalating tensions over Taiwan all demonstrate that geopolitics continues to significantly impact economic and financial outcomes—particularly within the Middle East, where it has always held considerable sway.

TradeFxP Features

If you choose to be a self-employed retail trader, here are a few things we offer:

The best trading Platform
No Requotes
Lowest Spreads
High-level liquidity
Interbank connectivity
Pure STP/DMA/ECN
Free signals
Best support
Crypto Wallet and withdrawals / Deposits (USDT)
Robust CRM
TradeFxP wallet
Once click withdrawal
Multiple payment options
Local offices to walk in
Free VPS
Free Video Chat / Virtual Meetings
And many more…

If you choose to be a part of our managed account program:

All of the above +
1-2% Daily Profits
High-level risk management
Capital protection
Only 30% of the capital used
Negative balance protection
Our fee is from the profits only
Monthly profit withdrawal
Wallet system – Use it like Phonepe, or Google Pay
Crypto wallet and withdrawals / Deposits (USDT)
Live monitoring
MyFxbook Live monitoring
Copy Trading
And many more…

Optional: If you do not withdraw your profits for 2 months, our system will use those profits to trade and will keep your 100% capital safe and secure for margin purposes. This is optional, and if you choose not to be a part of it, you can withdraw your profits from the first month itself.

Why 1-2% daily? Can't your managed forex account earn more?

Yes, we can! Remember: greed may be good in the beginning, but in the end, it will destroy everything. You and I know that! Many droplets make an ocean! Join the Managed Account Program and sit back for six months, then look at your account. You'll see that our strategy is good and the best. Do you know what I mean?

If you choose to be a part of us as an introducing broker (IB) or channel partner,