A sharp rise in geopolitical risk and the Israel-Gaza conflict potentially escalating into a regional war involving Iran and Hezbollah are raising significant economic concerns for Lebanon, Israel, and Iran.
Analysts predict severe consequences for these countries, with Lebanon expected to suffer the most.
Lebanon faces severe economic contraction
Lebanon, already grappling with a prolonged political stalemate and economic crisis, is likely to see its gross domestic product shrink significantly if the conflict extends into its borders.
“Based on the Israeli threats of destroying vast parts of Lebanon’s infrastructure, and punishing the Lebanese state, I forecast a contraction of 10 per cent to 15 per cent this year,” said Nassib Ghobril, head of group economic research at Beirut-headquartered Byblos Bank.
Geopolitical risks have surged in the Middle East following the killing of Hamas political leader Ismail Haniyeh in Tehran and Hezbollah commander Fouad Shukr in a south Beirut suburb.
These events have escalated tensions, with Iran’s supreme leader vowing retaliation against Israel.
Impact on Lebanon’s infrastructure and economy
Lebanon has a history of proxy wars and armed conflicts, but its current economic fragility puts it at risk of a “complete collapse,” according to Naeem Aslam, chief investment officer at Zaye Capital Markets.
An aggravated military conflict between Israel and Hezbollah would further damage Lebanon’s already struggling economy.
The impact will not be anything like what happened in Palestine. I don’t think that anyone who’s looking at this scenario currently thinks that. It is going to be very much contained.
In an escalation scenario, probable Lebanese targets could include Hezbollah military assets near critical infrastructure such as Beirut-Rafic Hariri International Airport and Beirut seaport, as well as smaller ports in southern Lebanon, according to S&P Global Market Intelligence.
The country’s economy has already suffered damages worth $1.5 billion due to the ongoing conflict, local media reports suggest.
Lebanon is currently experiencing one of the worst global financial crises since the mid-19th century, with the banking sector facing over $70 billion in losses and its currency devaluing by more than 90% since 2019.
Economic ramifications for Iran
Iran, which has already faced direct military confrontations with Israel, is also at risk.
The killing of Hamas political leader Ismail Haniyeh in Tehran complicates President Pezeshkian’s efforts to engage with the West and alleviate sanctions that have crippled Iran’s economy.
A retaliation against Israel by Tehran could hinder its efforts to boost investment in sectors like renewable energy and its oil and gas infrastructure. Iran’s economy has continued to grow despite sanctions, with GDP reaching 4.7% last year.
However, growth is expected to slow to 3.3% this year and 3.1% in 2025, according to the International Monetary Fund.
Israel’s economy under pressure
Israel’s economic growth has slowed since it launched its offensive in Gaza following the October 7 attacks by Hamas-led militants, which resulted in 1,200 Israeli deaths and 240 abductions.
Israeli strikes in Gaza have killed nearly 40,000 people.
The Israeli economy, now expected to grow by 1.5% in 2024 and 4.2% in 2025, is under strain.
The Bank of Israel downgraded the country’s growth outlook due to the war’s impact, estimating the conflict’s cost at about 255 billion shekels or 13% of the 2024 forecast GDP.
This includes both higher defense and civilian spending and lower tax revenue.
Broader regional implications
The conflict’s escalation could also impact the tourism, shipping, and oil sectors. Countries have issued travel advisories against Lebanon, Israel, and bordering Jordan and Egypt. Air Algerie suspended flights to and from Lebanon, highlighting the tourism sector’s vulnerability.
Tourism, accounting for 12% to 26% of current account receipts for Lebanon, Jordan, and Egypt, could lose about $16.1 billion in revenue due to the conflict, S&P estimates.
The conflict also threatens global shipping routes. Yemen’s Houthi militia has vowed to intensify its campaign in the Red Sea, a vital trade corridor.
Houthi attacks could escalate, causing significant disruption to commercial shipping and deployed naval support, said Jack Kennedy, head of MENA country risk at S&P Global Market Intelligence.
Rising oil prices and global economic implications
Iran’s direct involvement in the conflict could lead to a spike in oil prices and increased market volatility, impacting the global economy.
An increase in global crude prices would reignite inflation concerns, according to Aslam.
The overall economic threat extends beyond the immediate region, affecting investor confidence and various sectors globally. The conflict’s repercussions underscore the interconnectedness of geopolitical stability and economic health.
The post What a full-blown Iran-Israel war could mean for the Middle East economy? appeared first on Invezz
