The ongoing hostilities could affect European economies via lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence, Europe Economics Analyst Katya Vashkinskaya highlighted in a research note Wednesday.
Concerns are growing among economists that the conflict could spill over and engulf the Middle East, with Israel and Lebanon exchanging missiles as Israel continues to bombard Gaza, resulting in massive civilian casualties and a deepening humanitarian crisis.
Although the tensions could affect European economic activity via lower trade with the Middle East, Vashkinskaya highlighted that the continent’s exposure is limited, given that the euro area exports around 0.4% of the GDP to Israel and its neighbors, while the British trade exposure is less than 0.2% of the GDP.
She noted that tighter financial conditions could weigh on growth and exacerbate the existing drag on economic activity from higher interest rates in both the euro area and the U.K. However, Goldman does not see a clear pattern between financial conditions and previous episodes of tension in the Middle East
The most important and potentially impactful way in which tensions could spill over into the European economy is through oil and gas markets, Vashkinskaya said.
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“Since the current conflict broke out, commodities markets have seen increased volatility, with Brent crude oil and European natural gas prices up by around 9% and 34% at the peak respectively,” she said.
Goldman’s commodities team assessed a set of downside scenarios in which oil prices could rise by between 5% and 20% above the baseline, depending on the severity of the oil supply shock.
“A persistent 10% oil price increase usually reduces Euro area real GDP by about 0.2% after one year and boosts consumer prices by almost 0.3pp over this time, with similar effects observed in the U.K.,” Vashkinskaya said.
“However, for the drag to appear, oil prices must remain consistently elevated, which is already in question, with the Brent crude oil price almost back at pre-conflict levels at the end of October.”
Gas price developments present a more acute challenge, she suggested, with the price increase driven by a reduction in global LNG (liquefied natural gas) exports from Israeli gas fields and the current gas market less able to respond to adverse supply shocks.
“While our commodities team’s estimates point to a sizeable increase in European natural gas prices in case of a supply downside scenario in the range of 102-200 EUR/MWh, we believe that the policy response to continue existing or re-start previous energy cost support policies would buffer the disposable income hit and support firms, if such risks were to materialize,” Vashkinskaya said.