The regional escalation has taken a new direction as Iran initiated retaliatory strikes, targeting Israeli territory for the first time. This has shifted the conflict between the two parties from a covert war to a direct confrontation, but it is being conducted in a disciplined manner to prevent the region from sliding into an overt and all-encompassing war.
Notwithstanding the symbolic significance and temporal constraints of the strike, it generated transitory economic consequences, impeding the operations of certain critical economic sectors. Furthermore, its economic toll on Israel outweighed its political and military toll, as the majority of the assaults were thwarted by Israeli defenses reinforced by support from Britain and France.
Immediate Reverberations
In an era of unparalleled instability in the global and regional economies, the Iranian offensive against Israel has yielded several economic repercussions that can be delineated as follows:
Air Travel Disruption: The aviation and air travel industry has been significantly impacted by the escalation between Iran and Israel in the Middle East, causing it to experience the most substantial disruption since the September 11 attacks. During the Iranian attack, Jordan, Lebanon, and Iraq all temporarily restricted airspace, whereas Israel and Iran imposed temporary restrictions on airlines that fly over their territory. Several countries, including Germany, France, India, Poland, Austria, and Italy, have warned their citizens against visiting Iran, Israel, and the Middle East.
Additionally, on April 13 and 14, at least a dozen airlines—including Qantas, Lufthansa, United Airlines, and Air India—were compelled to cancel or alter their flight schedules.
Geopolitical tensions have caused flights to be redirected, resulting in longer routes and increased costs for airlines. This may lead to higher prices for flights on these routes, further adding to the challenges faced by the aviation sector amid the ongoing Russian-Ukrainian war and the war in Gaza, highlighting the interconnectedness between geopolitical tensions and the global aviation network.
Notwithstanding these disruptions, the situation has returned to its usual state as major airlines in the Middle East and North Africa, such as Etihad Airways, Qatar Airways, and Emirates, have declared the recommencement of their services in the region. This comes after the cancellation or alteration of certain flights to and from Jordan, Lebanon, and Iraq.
Oil Price Fluctuations: Geopolitical tensions typically have a swift impact on oil prices. However, it is important not to overstate the significance of the recent escalation between Iran and Israel. On Friday, April 12, Brent crude futures closed with a modest increase of 0.8% at $90.45 per barrel, while WTI crude futures contracts rose by 0.75% to reach $85.66 per barrel.
The immediate impact of the Iranian attack on oil markets was swiftly mitigated, and oil prices swiftly returned to their pre-attack levels. On Monday, April 15, Brent crude and WTI crude both experienced a decline in price, falling to $89.67 per barrel and $84.93 per barrel, respectively.
Oil price volatility can be attributed to escalating investor apprehensions regarding the burgeoning conflict in the Middle East and the consequential risk to the region’s oil supplies, which constitute a significant proportion of total crude supplies. Nevertheless, it is important to acknowledge that oil prices are influenced by various factors beyond the events in the Middle East, including the ongoing conflict in Gaza, demand projections from global organizations, data on US oil reserves, and decisions made by OPEC+ countries, particularly in light of Saudi Arabia and Russia’s continued practice of reducing oil production.
Rising Demand for Safe Assets: As investors naturally seek safe havens to hedge against the unpredictability of economic prospects and the dangers of inflationary pressures, gold prices are positively correlated with the escalation of geopolitical tensions. In light of this, gold futures prices increased by approximately $1.4 to reach $2374.1 per ounce on April 12, resulting in a weekly gain of 1.2%, before experiencing a minor decrease in trading on April 15 at $2,343 per ounce.
Global Supply Chains under Pressure: The Iranian assault on Israel exacerbates the current challenges faced by global trade and supply chains, which have already been greatly affected by the Covid-19 pandemic, the ongoing Russian-Ukrainian conflict, Houthi attacks on ships passing through the Red Sea, and the disruption of traffic in the Panama Canal.
This comes just days after the World Trade Organization (WTO) released a report on trade trends in 2023 and Outlook for 2024, indicating a 1.2% decline in global trade volume in 2023, with a slight recovery of 2.6% and 3.3% expected in 2024 and 2025, respectively. However, the WTO issued a warning regarding the impact of geopolitical tensions, economic uncertainty, and conflicts on the stability of international trade, given the escalating expenses associated with shipping and transportation of different kinds that could impede the recovery of trade.
A Blow to the Israeli Economy: In response to the current escalation in the Middle East, Tel Aviv has intercepted dozens of Iranian missiles and drones, costing the Israeli budget approximately ILS 5 billion ($1.35 billion). The escalation has had an impact on the Israeli stock market, as evidenced by the principal stock index of Tel Aviv, which dropped to 1938.67 points during trading on April 15, after surpassing the threshold of 2000 points in late March 2024 for the first time since the Gaza War broke out in October 2023. Furthermore, the Israeli shekel depreciated to $3.7 against the US dollar.
This impact coincides with the deteriorating adverse consequences experienced by the Israeli economy since October 2023, including the deceleration of GDP growth to 2% by the end of 2023, a decrease from 6.5% in 2022, and the decline in per capita GDP by 0.1% last year, contrasting with the average growth of 1.2% in the Organization for Economic Cooperation and Development. The Central Bank of Israel predicts that the economy will experience a growth rate of 2.3% in 2024 and 2.8% in 2025, compared to the approximately 2% growth recorded in 2023.
Add to this a 6% a year-on-year drop in Israeli exports to $156 billion in 2023 as a result of the ongoing war in Gaza, global market instability, currency fluctuations, and a 3% drop in services exports in 2023 as the effects of the war in Gaza worsen on the tourism sector.
Furthermore, Israel’s debts doubled to ILS 160 billion in 2023, which included ILS 81 billion since the start of the Gaza conflict. Relatedly, in February 2024, Moody’s downgraded Israel’s sovereign credit rating for the first time ever. Meanwhile, Standard & Poor’s downgraded the Israeli economy’s future outlook from stable to negative at the end of October 2023. Tech giants are still packing up and leaving the country.
Negative Impact on the Iranian Economy: The Iranian currency experienced a significant depreciation in value against the US dollar on the black market subsequent to the escalation with Israel. It peaked at IRR 705,000 per US dollar, in contrast to the official exchange rate of IRR 42,000 per dollar established by the Iranian government in 2018.
Furthermore, the Iranian economy is currently grappling with several crises. These include rampant inflation, escalating prices of essential goods, deteriorating labour market, soaring unemployment rates, a trade deficit, and the adverse impact of Western sanctions on the oil sector. It is anticipated that these sanctions will further escalate in the near future, as Washington plans to hit Iran with more sanctions after its attack on Israel.
Concluding Remarks
The Iranian assaults on Israel coincide with a period of global economic vulnerability caused by a series of crises and conflicts in recent years, such as Covid-19, the Ukraine war, and the Gaza war. The latter conflict introduces a new factor that further strains the world’s economies.
The recent Iranian strike exposed the vulnerabilities of the global economic system due to globalization, trade liberalisation, and the interdependence of supply chains. A crisis that transpires in one region may engender extensive adverse consequences in other regions that are geographically distant, thereby exposing vulnerabilities in the economic interdependence among countries and compromising the integrity of supply chains.
Despite the transient nature of the aforementioned consequences, a recurrence and intensification of them are possible in the event of reciprocal retaliation, which would signal an expansion of geopolitical tensions and potentially result in further adverse effects such as rising gold and oil prices, as well as increased unrest in the shipping and air travel industries.
