Wider wars?

Ahmed Mustafa , Sunday 3 Mar 2024

With the ongoing Gaza war and escalations in the Red Sea, the future of the region looks bleak.

Wider wars

 

This week, the US continued to bomb Yemen in retaliation for Houthi attacks on ships crossing the Red Sea’s southern tip at Bab Al-Mandeb. Meanwhile the Israeli government is refusing all truce-brokering efforts in its war on Gaza. Attacks on ships by the Iran-backed Houthis and the bombardment of Yemen by the US escalated this week, stoking fears of a greater negative impact on the region and the world.

The Houthis started targeting “Israeli ships or ships that are trading with Israel” in November, saying that attacks will continue until the war on Palestinians stops. Since then some major shipping companies have avoided the Red Sea maritime lane, using the long Cape of Good Hope route instead. That resulted in delays of up to two weeks and increased costs for maritime freight.

By New Year the US, UK and ten other countries formed a coalition against the Houthi attacks, but problems in the region have only worsened. American and British bombardment of Houthi sites in Yemen would not deter them from more attacks on ships and tankers – now expanded to supposedly British and American ships.

According to the US military this week, the American army intercepted cruise missiles, drones and even remotely controlled unmanned submarines used by Houthis towards targets in the Red Sea. Now, more ships are avoiding the troubled area, while the continuing war on Gaza and the increasing possibility of escalation on the Lebanese front is adding to pressures on global trade and the world economy, as well as Arab countries.

At the beginning of the war last year many international institutions adopted the benign scenario that conflict would be contained in Gaza with only low-intensity clashes with pro-Iran groups in the region. That meant the impact of the war would be felt by the Israeli economy, and the economies of countries neighbouring Palestine like Lebanon, Egypt, and Jordan.

With the announcement last week that two of the G7 nations are in recession, Japan and the UK, after their economies shrank in the second half of last year — and the possibility that a third, Germany, will follow suite — downgrades of global economic prospects have been ongoing. Other factors preceding the Gaza war might have led to negative growth, but the war and turmoil in the Red Sea have made a significant contribution.

The International Monetary Fund (IMF) has already downgraded the outlook for growth, especially for the Middle East and North Africa. It cited the continuation of the war on Gaza as a main reason for the downgrade. Last week, the Institute of International Finance (IIF) issued a gloomy report on “Global Economic Fallout of a Regional War in the Middle East”.

The IIF report concluded that the region, a crucial transport corridor for 35 per cent of the world’s oil and 13 per cent of the world’s natural gas, is “on the brink of a conflict that could disrupt global commodity prices, trade, and economic growth.” It increased the probability weight of that worst-case scenario.

“In our pessimistic scenario, with 30 cent probability, we assume that the conflict escalates into a full-blown war with Hizbullah, and to a lesser extent with Iran, that could lead to a disruption of oil and gas shipping in the Strait of Hormuz… In such a scenario, energy prices surge, leading to higher inflationary pressures and weaker global growth,” the report said.

Indications that the situation is moving towards that IIF scenario are evident in the failure to stop the war after almost five months. The US and the UK will not be able to degrade the capacities of the Houthis, whose attacks on shipping in the Red Sea continue to escalate into a full blown war. That would include the launching of rockets and missiles into Israeli cities and heavy bombardment of major cities in Lebanon by Israel. The Houthis may also target oil tankers and carriers that transport raw materials, such as iron ore and grain, raising commodity prices.

Oil and gas prices could rise by 40 per cent, with a barrel of oil reaching $120. In combination with other factors, that could wipe out 0.4 per cent of the global economy, according to the IIF analysis. It is not only the economy that is feeling the hit, but the impact on regional politics is equally negative.

“The normalisation of relations between Israel and other countries in the region, most notably Saudi Arabia, will be postponed indefinitely. With Saudi authorities recently stating that no normalisation will occur until a two-state solution is found… Under our pessimistic scenario, the consequences for the Middle East region would be dire,” the IIF said.

The IIF is not alone in revising previous expectations about the war and its impact on the region and the world. Many other institutions are doing the same. This week, Standard & Poors issued a report showing to what extent the impact of the war and the Red Sea attacks is felt by European companies. The report concluded that the mere continuation of the conflict, even if it does not escalate into an all-out regional war, is stoking inflationary pressures and threatening growth. That is due mainly to Houthi attacks affecting supply chains of European manufacturers.

* A version of this article appears in print in the 22 February, 2024 edition of Al-Ahram Weekly

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