The ongoing Israel-Hamas conflict, which began with Hamas’s attack on Israel on October 7, is escalating economic threats to the Eurozone, according to Goldman Sachs. Katya Vashkinskaya, Europe Economics Analyst at Goldman Sachs, highlighted potential threats including a decrease in regional trade and tightened financial conditions that could impact consumer confidence.
The conflict has significantly impacted oil and gas markets with prices rising by approximately 9% and 34% respectively. A sustained 10% increase in oil prices could potentially shrink the Euro area real GDP by 0.2% after one year and inflate consumer prices by nearly 0.3pp. These concerns are shared by Bank of England Governor, Andrew Bailey, and the World Bank, which warned that prices could surpass $150 a barrel if the conflict continues to escalate.
Despite recent stabilization in prices, a global reduction in LNG exports is causing European prices to rise. However, Vashkinskaya suggests that energy cost support policies could potentially mitigate these impacts.
The conflict also poses a risk to consumer confidence, as seen from its decline following Russia’s invasion of Ukraine in March 2022 and the record-high conflict-related uncertainty observed in October.
Even though the Eurozone’s direct exposure to the Middle East is limited (0.4% of the euro area’s GDP from Middle East trade), indirect effects like higher interest rates could exacerbate impacts. Despite the Eurozone’s limited exposure to the Middle East, factors such as potential disruptions in oil and gas markets, high interest rates in both the Eurozone and the UK, and decreased regional trade could lead to severe impacts on the European economy.
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