Mohamed Aly El-Erian, chief economic advisor of Allianz SE, during a Bloomberg Television interview in London, Britain, Monday, September 25, 2023. El-Erian spoke alongside former British Prime Minister Gordon Brown and economist Michael Spence, his company -authors for their book Permacrisis: A Plan to Fix a Fractured World.
As the war between Israel and Hamas enters its fourth week, the risks to the global economy are increasing, economist Mohamed el-Erian said on Monday.
The conflict escalated on Monday after Israel’s military said it had widened its ground offensive in Gaza as it continued its offensive in response to the October 7 terror attacks by the militant group Hamas.
El-Erian, who is chief economic adviser at Allianz, said the longer the battle drags on, the greater the chance it will escalate into a regional conflict with implications for global financial markets.
“The longer this conflict goes on, the more likely it will escalate,” el-Erian told CNBC’s Dan Murphy during a panel session at the AIM Summit in Dubai.
“The higher the risk of escalation, the higher the risk of contagion to the rest of the world in terms of economy and finance,” he continued.
El-Erian said such contagion would compound the already pervasive problems facing the global economy, including stagnant growth, stubbornly high inflation and the wider fragmentation of markets.
“This conflict, in a way, reinforces all the challenges that existed and that were already significant,” he said.
The impact on global markets in response to the start of the war was initially limited, as investors first assessed that the conflict had been contained. However, the prospect of regional expansion into other players, such as Iran and Lebanon, added a sense of unease in markets.
Oil has been particularly volatile, amid concerns that an escalation could limit supply from the energy-rich region. Oil prices rose on Friday after Israel said its troops were expanding their ground operation, but fell on Monday as investors looked ahead to the Federal Reserve’s monetary policy meeting on Wednesday.
Kristalina Georgieva, head of the International Monetary Fund, on Wednesday called the worsening of the Israel-Hamas conflict another cloud on the horizon of an already gloomy economic outlook.
“It’s terrible in terms of economic prospects for the epicenter of the war,” she said. “(There will be) a negative impact on the neighbors: on business channels, on tourism channels, cost of insurance.”
Middle East peace talks stall
The October 7 terror attacks carried out by Hamas occurred as Israel made moves to normalize diplomatic relations with its Arab neighbors, including Saudi Arabia.
Asked what the ongoing conflict means for those ambitions, el-Erian said the outlook has become both bleaker and more urgent.
“People look at this and feel a sense of desperation that I haven’t seen before,” he said.
“The longer it (the conflict) goes on, the more important your question will become, and it really should be asked of the politicians.”
El-Erian’s comments mirror those made last week by World Bank President Ajay Banga, who told CNBC that the conflict makes the goal of regional cooperation in the Middle East much more difficult.
“We have been working for a more peaceful Middle East and many countries in this region have started talking to each other about the opportunity to move forward with a new platform of being together,” Banga said on Tuesday. “I think it’s obviously going to take a while for that to work one way or the other.”