Increasing Tensions in Israel-Hamas Conflict Fuel Concerns of Global Economic Impact

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Amidst the ongoing conflict between Hamas and Israel in the Middle East, along with the ongoing war between Russia and Ukraine, the global economy is confronted with significant uncertainty. These conflicts not only pose a threat to the regions where they are taking place but also have the potential to strain the already weakened interconnectedness among the world's major economies.

The global economy has witnessed increased integration in the last century, with the growth of international supply chains and exponential advancements in technology. This has greatly facilitated the unrestricted movement of trade, capital, and information on a global scale.

This interconnectedness is commonly referred to as globalization, which gained momentum in the latter half of the 20th century after Germany's reunification post-WWII and further expanded with China's emergence as a dominant force in international trade.

However, the global financial crisis in 2008 has led to a weakening of these ties, as many nations have implemented protectionist policies aimed at stabilizing their economies and safeguarding domestic industries from foreign competition. This shift in economic relations is referred to as deglobalization, as analyzed by Wells Fargo.

Some economists claim that globalization has come to a halt, and others contend that it is actually reversing due to various factors such as the Trump administration's trade conflict with China, the Covid-19 pandemic, and Russia's invasion of Ukraine. Wells Fargo economists have recently expressed a pessimistic view, suggesting that globalization has reached its end. They highlight not only the increase in restrictive trade policies that they deem detrimental but also the significant decrease in global foreign direct investment.

Israel's decision to declare war on Hamas could potentially serve as another catalyst for the process of deglobalization, although the full scope of its impact is yet to be determined. Before the Bell recently interviewed Brendan McKenna, an internationally recognized economist from Wells Fargo, to gain insights on how the ongoing Israel-Gaza conflict has the potential to expedite deglobalization.

(This interview has been lightly edited for length and clarity.)

Before the Bell: What role could the Israel-Gaza conflict play in deglobalization?

Brendan McKenna: Geopolitical relations in the Middle East were showing signs of improvement. Unfortunately, the recent events in Israel and Gaza have caused a setback to the progress that had been made. This disruption in geopolitical stability results in decreased trade cooperation, limited information and technology sharing, and weakened financial market connections.

At the end of the day it is a deglobalization force.

What will determine how much of an impact the conflict has on deglobalization?

An escalation of the situation in the Middle East may result in a deeper division within the region and potentially strain relations among other significant economic players. Considering the United States' staunch support for Israel, it is conceivable that if China or other countries oppose or refrain from explicitly endorsing Israel, there is a chance that trade connections between the United States and those nations may deteriorate.

What impact would deglobalization have on inflation and monetary policy worldwide?

Deglobalization creates a less competitive global economic environment, leading to inflationary pressures and increased prices.

Continuing to experience economic fracturing driven by geopolitics will ultimately result in inflation, leading to higher interest rates not only from the Federal Reserve but also from other major central banks globally. Moreover, this scenario not only entails daunting forces that will hinder global GDP growth and constrain global economic activity, but it can also trigger tighter monetary policies, exacerbating these effects.

What are the potential benefits of deglobalization?

In the event of another major economic shock, such as a pandemic, the US would not have to depend on China for raw materials. By nearshoring production, significant time and cost savings can be achieved during times of shock.

During the Covid era, China's decision to halt production had a significant impact on the global supply chain, prompting the need for deglobalization in order to bring some production back to the United States. This move has the potential to not only strengthen domestic production but also foster better relations with Mexico and other nations.

Under the Trump administration, the US-Mexico relationship was characterized by some tension. However, if the United States demonstrates its commitment to the trade relationship by investing in infrastructure and establishing a presence in Mexico, it could greatly improve and enhance the geopolitical ties between the two countries.

So theres not only a possible economic benefit, but theres also maybe the political capital that can also be built up as a result of it.

How Israels vital tech sector is navigating the war

Israel's extensive technology sector has experienced various crises, including economic downturns, the Covid-19 pandemic, and intermittent escalations in the Israeli-Palestinian conflict, as reported by my colleague Hanna Ziady.

Despite these challenges, the industry has consistently recovered, establishing Israel as the renowned "startup nation" despite its relatively small population of 9 million.

The war initiated by the Hamas attack last weekend, resulting in over 1,300 fatalities in Israel, has severely disrupted daily life in a manner that poses a distinct challenge to the country's vital industry. In compliance with orders, schools have shut down, the formerly bustling streets of Tel Aviv, the business hub, have become deserted, and numerous businesses remain closed. While some are not operating due to security concerns, many are unable to function as their employees have been summoned for military duty.

"This is different than anything weve faced before," said Avi Hasson, the CEO of Start-Up Nation Central (SNC), a non-profit that promotes Israels tech industry globally.

Up Next

Monday: Philadelphia Fed President Patrick Harker gives a speech.

Tuesday: United reports earnings. Statistics Canada publishes September inflation data. The US Commerce Department provides September retail sales figures. The Federal Reserve releases September industrial production data. The National Association of Home Builders releases its October Housing Market Index. Fed officials John Williams, Tom Barkin, and Michelle Bowman give speeches. China's National Bureau of Statistics releases September data on industrial production, retail sales, fixed-asset investment, and third-quarter gross domestic product.

On Wednesday, Procter & Gamble and Tesla will announce their earnings. The Office for National Statistics in the United Kingdom will release the September inflation data. Additionally, the US Commerce Department will release the September figures on housing starts and building permits. Remarks will be delivered by Fed officials Christopher Waller, John Williams, Michelle Bowman, Lisa Cook, and Patrick Harker.

On Thursday, American Airlines will announce their earnings. The US Labor Department will report the number of worker filings for jobless benefits in the week ending October 14. Federal Reserve Chair Jerome Powell will participate in a discussion in New York. Remarks will be delivered by Fed officials Austan Goolsbee, Michael Barr, Raphael Bostic, and Patrick Harker. Moreover, Japan's statistics agency will release the September inflation data.

Friday: Fed officials Patrick Harker and Loretta Mester deliver remarks.