Will The Wrath Of Wars Make A Dent In The World Economy And Financial Markets?

It's been more than a year since the Russia-Ukraine war started which took many lives and livelihoods and today Palestinian militants in the Gaza Strip carried out a shocking infiltration into southern Israel and fired 5,000 odd rockets into the country as the ruling Hamas group announced a new operation.

Israel's PM has said "We are at war" in a short video.

Clearly, there is a humanitarian crisis around the world and it is time for the global leaders across to take a stand to protect humanity at any cost. But there is a deeper impact of war that leaves behind permanent scars not only in the society but also in the economy. While there is plenty of room to address any crisis, it is questionable how much will be or in this case can be done.

Just when the global economy had rebounded from the pandemic-led recession where most countries in the world contracted, stocks market slipped and millions were left unemployed, a slew of war between neighbouring countries could now damage the already weak economic environment worldwide and financial markets might lose a whoping amount of cash.

Historically, whenever there is a conflict, bearish sentiment emerges in markets amongst investors. On February 24, 2022, when Russia invaded Ukraine, Moscow's MOEX index dropped almost 9% in the week following the invasion. While most indices recovered in a year, investors lost hundreds of millions of dollars.

The figure shows daily percentage return of major stock market indices following the invasion. Source: Financial Times; Bloomberg.

The Russian-Ukrainian war, with its impact on energy and food prices, has accelerated the inflationary pressure worldwide. The macroeconomic impact via commodity markets and rising inflationary pressure could push global economies into recession.

From COVID crisis to war, people across the globe have been facing shortages of food to shelter to jobs and basic necessities. Ukraine's economy has shrunk to a third of what it was before the war and Russia is facing increasing number of sanctions which is impacting its economy adversely.

Will A War Solve the Problem between Israel and Palestine?

This is a rhetorical question. Benjamin Franklin once said " There never was a good war or a bad peace."

Israeli Prime Minister Benjamin Netanyahu declared war on the Hamas terror group on Saturday, following a massive attack that left at least 100 people dead, over 500 people injured, and involved terrorist incursions into several southern towns along with the launch of thousands of rockets targeting the central and southern regions of the country, as reported by Israel's N12. In fact, around 50 Israeli hostages are also held by Hamas gunmen in Beeri Kibbutz near Gaza border.

The Israeli-Palestinian conflict is one of the world's most enduring conflicts, beginning in the mid-20th century. Many attempts were made to resolve the conflict as part of the Israeli-Palestinian peace process, alongside other efforts to resolve the broader Arab-Israeli conflict.

In the past major hostilities between Israel and Hamas, a 2014 war that lasted seven weeks, Israel's central bank estimated its economy took a 3.5 billion shekel hit, plus nearly the same amount in damage to the tourism sector, according to a Reuters report.

If the conflict between these two countries continue, there will be severe implications on the economies and the financial markets. The International Monetary Fund estimates the global economy to grow 2.9% in 2023, it remains to be seen if that can be achieved as trade will be hit and any conflict in the middle east has historically sky rocketed energy prices.

The stakes are high and unknown.