The outbreak of military conflict in the Middle East may deal a blow to world economic confidence as the violence in Gaza, added the possibility of a broader regional conflict to the sense of global instability sparked by Russia's invasion of Ukraine almost 20 months ago, and at a time when central bankers had expressed growing hope about containing the price surge, and concern about whether the conflict is likely to lead to new inflation pressures.
The impact would depend on how long the conflict lasts, how intense it becomes, and whether it spreads to other parts of the region. The war could add an unpredictable set of forces to a global economy that was already slowing and to US markets still adapting to the likelihood that the Federal Reserve will maintain high-interest rates longer than many investors had expected.
Any source of economic uncertainty delays decision-making and increases risk premia. The region is home to major oil producers like Iran and Saudi Arabia and major shipping lanes through the Suez Canal.
The conflict poses a risk of higher oil prices and risks to both inflation and the growth outlook. And with heightened concerns about the global economy, capital might rush towards the relative safety of US Treasury bonds, as often happens at times of potential crisis.
