How potential Middle East conflict scenarios could affect businesses

What are the signs that suggest a contained scenario?

Key actors actively work to telegraph their military operations. By doing so, they reduce the likelihood of surprise attacks, helping prevent significant escalation. A reduction in the number of direct confrontations between Iran and Israel also reduces the intensity of the conflict. Pressure from external powers on regional actors to reduce hostilities and reach resolutions could signal a shift toward this scenario, and domestic pressures in various countries may also lead to de-escalation of the situation based on assessments of significant harm to national economies. 

What is the likely outcome of a contained scenario? 

It could result in de-escalation across most or all Middle Eastern conflict zones, although sporadic clashes may persist. The overall reduction in violence would lower the immediate threat to regional stability.

What would be the impact on regional economies and business activity? 

Moderate disruptions in intra-regional trade are likely since isolated instances of conflict could still affect key trade routes. However, these disruptions would not be severe enough to cause long-term damage to the regional business environment. Some sectors, such as tourism, however, could potentially be depressed even after a reduction in hostilities.

What would be the global economic consequences?

A small short-lived rise in oil prices is expected due to lingering instability, but global markets would likely absorb these fluctuations without significant long-term volatility. Financial markets may see brief turbulence, though global trade and economic growth would largely remain stable.

We assume oil prices only rise by $3 per barrel relative to our baseline for a year, while financial market volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX) rises 1 point higher than our baseline forecast for six months. 

The global economic consequences of this scenario are marginal, with only a slight and temporary tightening of financial conditions and limited consequences for the private sector. Trade disruptions outside of the regions directly affected are minimal. 

On a year-over-year basis, global real GDP growth is reduced by around 0.1 percentage point (ppt). Similarly, the impact on real GDP growth in the US, eurozone, UK, Japan and China is around 0.1ppt to 0.2ppt. 

Global Consumer Price Index (CPI) inflation would initially rise marginally because of higher energy costs but end 2024 less than 0.1ppt higher. Major central banks around the world largely discount geopolitical developments to the extent that they would have a limited impact on domestic growth, employment and inflation dynamics.

What are the signs that suggest a moderate escalation scenario?

A marked increase in the frequency and intensity of armed operations, particularly by non-state groups, signals a broadening conflict, potentially escalating due to miscalculations, shifting strategic interests or increased involvement from external actors. Key actors reduce efforts to telegraph attacks, raising the element of surprise and signaling escalation. Lastly, ongoing disruption to ocean-based freight, including vessel damage and/or fatalities, could similarly draw in greater conflict zone involvement by external actors.

What is the likely outcome of a moderate escalation scenario? 

The likely outcome of a moderate escalation scenario would be heightened violence in some conflict zones such as Israel, Gaza, Lebanon and Yemen. However, conflicts would remain localized and not grow into regional conflagration. The intensification of hostilities would increase risks of military missteps and further draw regional and global powers into the conflict.

What would be the potential regional economic impacts?

Trade networks and supply chains would face significant disruptions, putting additional strain on regional economies. More severe sanctions would likely challenge business relationships with certain regional entities. 

What would be the global economic consequences?

A moderate rise in oil prices is expected given the risk of disruption across oil-producing countries along with disruptions to global trade flows and rising market volatility. Global inflation would rise, and global GDP growth would suffer a moderate drag, with certain countries experiencing more pronounced impacts given their energy dependency.

In this scenario, we assume oil prices rise by $10 per barrel relative to our baseline for a year and then trend back to $5 higher after a year. Financial market volatility as measured by the VIX spikes 5 points higher than our baseline in the first six months, but then reverts to the baseline after a year. We also assume notable trade disruptions forcing many cargo ships to avoid the Red Sea and Suez Canal, instead navigating around the Cape of Good Hope and increasing shipping times by 14 days. This leads to renewed significant supply chain strains and inflationary pressures.

The global economic consequences of this scenario are moderate, with the tightening of financial conditions — stemming from pressure on equity prices down around 5% across most regions, 3% US dollar appreciation and rising volatility — constraining private sector activity and modest trade disruptions outside of the regions directly affected by the conflict. 

The rise in oil prices and goods prices from trade disruptions would lead to “demand destruction” in an environment where cost fatigue due to persistently elevated price levels and interest rates are already weighing on final demand. 

The global GDP loss over a year would cumulate to nearly $550b, with real GDP reduced by 0.5% after a year. On the US front, the real GDP loss over a year would cumulate to nearly $150b, with real GDP reduced by 0.4% after a year. Real GDP in China (-0.4%), the eurozone (-0.6%), UK (-0.4%) and Japan (-0.7%) would also be significantly curtailed.  

Global CPI inflation would initially rise because of higher energy costs and increased supply chain stress, ending the year about 1ppt higher than in the baseline. While inflation would then start converging toward the baseline because of demand destruction, normalizing oil prices and reduced trade and financial markets stress, prices would remain 0.7% higher. The US inflation shock would be about 0.5% due to an offset from a stronger US dollar. Across regions, inflation in the eurozone (0.9%), UK (1.0%) and China (0.5%) would also be higher after a year. 

While some hawkish central bankers might be inclined to tighten monetary policy further in this scenario, the tightening of financial conditions, the slowdown in economic activity and downside risks to growth would also be factored in. We assume policymakers would accelerate the pace of policy easing by about 50 basis points (bps) relative to our baseline but then stabilize the cuts at similar levels in line with estimated long-term neutral rates.

What are the signs that suggest a significant escalation scenario?

A key signpost is the escalation in armed conflict by regional actors (state and non-state), especially the use of advanced technological capabilities (e.g., most advanced weaponry). Additionally, a reduction in diplomatic communications or the collapse of mediation efforts drastically increases the likelihood of widespread conflict across the region. Sustained or broadened incursions by militaries or non-state actors into others’ territories would be more likely to lead to expanded conflicts throughout the region.  

What is the expected outcome if a significant escalation materializes?

This could result in a significant escalation across all conflict zones, with sustained, direct confrontations between regional powers like Israel and Iran. This widespread conflict could destabilize the region and draw in external factors such as the US on a larger scale.

How would it affect regional economies and businesses?

Severe economic stress, significant oil supply shocks, currency volatility and widespread trade disruptions would ensue. Businesses in the region would face significant operational and personnel availability challenges, and key sectors could halt operations due to heightened conflict.

What would be the global economic consequences?

Elevated financial market stress and significant trade disruptions are likely, particularly in industries reliant on Middle Eastern oil and resources. This scenario could lead to a sharp increase in oil prices and potentially trigger significant inflationary pressures and global supply chain issues. Global financial market stress would also ensue.

In this scenario, we assume oil prices will nearly double, reaching $150 per barrel while financial market volatility as measured by the VIX spikes 13 points higher. We assume oil prices gradually fall back to about $30 above our baseline after 18 months while volatility eases gradually to about 5 points above our baseline after a year. 

The global economic consequences of this scenario are severe, with the tightening of financial conditions — stemming from equity prices plunging 10%, a 10% US dollar appreciation and rising volatility — constraining private sector activity. Severe trade disruptions around the Strait of Hormuz and Suez Canal could force most ships to avoid the Red Sea, instead navigating around the Cape of Good Hope and increasing shipping times by 14 days. This leads to renewed severe supply chain strains and inflationary pressures.

Surging oil prices would lead to severe demand destruction in an environment where global inflation fatigue and increased demand sensitivity to persistently elevated price levels, and interest rates are already weighing on final demand growth. 

A global recession would likely ensue in this scenario. Global real GDP would be reduced by 1.9% after a year, resulting in a $2.0t loss for the global economy. The US economy would enter a recession with the real GDP loss over a year cumulating to nearly $500b, or 2.0% after a year. Other major economies around the world would also suffer recession with real GDP in China (-1.9%), the eurozone (-2.3%), UK (-2.0%) and Japan (-2.6%) severely hit.  

Global CPI inflation would surge because of higher energy costs and supply chain stress, ending the year about 3.1ppt higher than in the baseline. While inflation would then start converging toward the baseline because of demand destruction, normalizing oil prices, and reduced trade and financial markets stress, prices would remain 4% higher. US inflation would accelerate about 2.1ppt above the baseline in the first year. Across regions, the eurozone, UK and China would see inflation over 2.8ppt to 3.6ppt higher after a year but also lower in the second year because of depressed economic activity.  

This scenario would create a massive challenge for central bankers faced with a stagflation shock – high inflation and depressed economic activity. The severe tightening of financial conditions and the global recessionary conditions would likely prompt major central banks, including the Fed, European Central Bank, Bank of England and People’s Bank of China to ease policy faster and by 100bps more than in our baseline. This would leave the policy rate about 100bps to 150bps lower than estimates of long-term neutral rates.

Three scenarios that outline various paths the conflict might take factoring oil supply shocks, financial market stress, trade disruptions and shifts in regional trade dynamics.