The conflict ramped up on Monday, after Israeli military said it had widened its ground offensive in Gaza as it continues its assault in response to the Oct.7 terror attacks by the Hamas militant group.
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El-Erian, who is chief economic advisor at Allianz, said that the longer the fighting continues, the greater the chance that 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 economics and finance,” he continued.
El-Erian said that such contagion would compound the already pervasive issues facing the global economy, including stagnating growth, stubbornly high inflation and the broader fragmentation of markets.
“This conflict, in a way, amplifies all of the challenges that existed and that were already significant,” he said.
The impact on global markets in response to the onset of the war was initially limited, as investors first assessed that the conflict was contained. However, the prospect of a regional spill-over pulling in other players, such as Iran and Lebanon, has added to a sense of unease in markets.
Oil has been particularly volatile, amid concerns that an escalation could restrict supply from the energy-rich region. Oil prices surged on Friday, after Israel said its troops were expanding their ground operation, but dipped on Monday, as investors looked ahead to the Federal Reserve’s monetary policy meeting of Wednesday.
Kristalina Georgieva, head of the International Monetary Fund, on Wednesday dubbed the worsening Israel-Hamas conflict as another cloud on the horizon of an already gloomy economic outlook.
“It is terrible in terms of economic prospects for the epicenter for the war,” she said. ”[There will be] negative impact on the neighbors: on trade channels, on tourism channels, cost of insurance.”
Middle East peace talks stall
The Oct. 7 terror attacks perpetrated by Hamas came as Israel had been making moves to normalize diplomatic ties with its Arab neighbors, including Saudi Arabia.
Asked what the ongoing conflict means for those ambitions, el-Erian said that the prospect had grown both more bleak and more pressing.
“People are watching this and are feeling a sense of despair that I have not seen before,” he said.
“The longer it [the conflict] continues, the more your question is going to become relevant, and it should really be asked to the policymakers.”
El-Erian’s comments mirror those made last week by the president of the World Bank, Ajay Banga, who told CNBC that the conflict had made the goal of regional cooperation in the Middle East much more difficult.
“We were working towards a more peaceful Middle East and many countries in this region have begun to speak to each other about the opportunity of moving forward with a new platform of being together,” Banga said Tuesday. “I think it’s clearly going to be a little while until this sort of works out one way or the other.”