A man cleans the floor near an electronic board displaying market data at the Tel Aviv Stock Exchange, in Tel Aviv, Israel on Nov. 4, 2020.AMIR COHEN/Reuters
John Rapley is a political economist at the University of Cambridge and the managing director of Seaford Macro.
A half century ago, war in the Middle East transformed the world economy. Today, it barely registers a blip in Western markets, revealing just how much the world has changed in the intervening period.
Fifty years ago, almost to the day, Egyptian and Syrian tanks crossed their ceasefire lines and launched a devastating attack on their enemy, Israel. With the much-vaunted Israeli intelligence apparatus having completely failed to see the warning signs of an impending invasion, the combined Arab forces advanced rapidly. Within days, Israel looked like it might cease to exist.
When United States president Richard Nixon decided to re-supply Israel lest it collapsed, the Saudi-dominated Organization of Petroleum Exporting Countries embargoed oil shipments to the U.S. in protest. Oil prices shot up across the world. Inflation went through the roof, plunging the global economy into recession and ending the quarter-century economic “golden summer” of the West. With prices rising but economies sinking, we confronted a new phenomenon known as stagflation.
That collective economic trauma shaped the Western world for the next two generations. It has dominated policy making ever since, and explains why central banks are today so determined to do exactly as they did back then: squeeze inflation out of the economy, whatever the cost. They point to the three-decade bull market in stocks, bonds and real estate that followed the lancing of inflation in the 1980s as proof that they must not now change course in raising interest rates.
So when war broke out last week in the Middle East, some may have been tempted to recall the economic legacy of the 1970s. After all, when Hamas crossed Israel’s border with Gaza and terrorized residents, it was clear Israel’s intelligence failure rivalled that of 1973. Would this war also damage the world economy?
The repercussions that follow in Israel will be as profound as those that followed that earlier war. Yet the impact on the world economy has been and will be muted. So far, government bonds rallied a bit as investors sheltered in U.S Treasury paper, oil prices ticked upward, but beyond that you’d be hard pressed to find many signs of stress. That’s partly down to the changed geopolitics of the Middle East: With more countries normalizing relations with Israel, there’s much less risk of the conflict escalating beyond the region.
Some observers have speculated on the hand of the Iranians in the Hamas operation, and warn that Israel’s retaliation would plunge the entire region into war. If that happened, the impact on the world economy would certainly be swift and harsh. Yet while Iran sponsors Hamas and is undoubtedly pleased with events, neither Israeli nor Western intelligence services have detected much of an Iranian role in the invasion. Meanwhile, the evidence on the ground suggests that Hamas carried this out largely on its own.
But the main reason a situation this tragic isn’t moving markets as it did in the 1970s is that the world economy has changed. The economy of the West in particular is much less dependent on oil than was the case then. Overall energy intensity has declined, the result being that energy bills comprise a smaller share not only of corporate but household budgets. In addition, the progress of decarbonization in many countries is such that oil is less vital to the powering of economies.
The Middle East was once the beating heart of the world economy. It no longer is. Any surge in oil prices will aggravate the battle on inflation being waged by central banks. But barring some dramatic turn of events, the world economy will skirt this storm.