Economic Implications of Middle East Conflict

By David Lawder

WASHINGTON (Reuters) – The International Monetary Fund (IMF) warned on Thursday that an escalation of the Middle East conflict could significantly affect the region’s and global economy, although commodity prices remain below last year’s highs.

IMF spokesperson Julie Kozack, during a regular news briefing, expressed “grave concern” over the situation in southern Lebanon and extended condolences for the loss of life.

“The potential for further escalation of the conflict heightens risks and uncertainty and could have significant economic ramifications for the region and beyond,” Kozack stated.

She noted it is too early to predict specific global economic impacts, but regional economies, especially in Gaza, are already suffering severely. The civilian population there “faces dire socioeconomic conditions, a humanitarian crisis, and insufficient aid deliveries.”

The IMF estimates Gaza’s GDP dropped 86% in early 2024. The West Bank’s GDP is likely down 25%, with expectations of further deterioration. In Israel, GDP contracted roughly 20% in the fourth quarter of 2023, showing only partial recovery in early 2024.

The IMF will release updated economic projections for all countries and the global economy later in October during the fall meetings with the World Bank in Washington.

Kozack mentioned that the intensified conflict in Lebanon is worsening its fragile macroeconomic and social conditions, highlighting Israel’s airstrikes on Hezbollah. “The conflict has inflicted a heavy human toll on the country, and it has damaged physical infrastructure,” she added.

The main economic impacts of the conflict include potential rises in commodity prices, particularly oil and grains, along with increased shipping costs due to risks from missile attacks in the Red Sea. Currently, commodity prices remain lower than past year’s peaks.

Kozack reiterated, “We’re closely monitoring the situation, which carries great concern and high uncertainty.”

Lebanon had previously reached a staff-level agreement with the IMF in 2022 regarding a loan program, but progress on necessary reforms has been insufficient. “We are ready to engage with Lebanon on a financing program when the situation permits, requiring decisive policy measures,” she stated. “Currently, we are supporting Lebanon through capacity development assistance and other areas where possible.”