The Middle East conflict is causing an economic crisis

Karina Tsui
·3 min read
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Semafor Signals

Insights from The Economist, NPR, and the U.S. Federal Reserve

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The war between Israel and Hamas has so far avoided escalating into a wider regional conflict, but Red Sea attacks by Houthi rebels have battered the already struggling economies in the Middle East.

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Massive drop in Red Sea traffic could devastate neighboring economies

Sources: The Economist, Reuters

The Red Sea typically accounts for a tenth of the world’s shipping, but Houthi attacks have brought traffic down 70% — depriving bordering nations of crucial aid and agricultural exports, among other essential goods. Eritrea relies on the channel for key exports, including fishing and mining, the Economist reported, while the Red Sea is the only way for aid to reach victims of Sudan’s civil war. The Red Sea is also a key source of revenue for Egypt, which earned $9 billion from Suez Canal tolls in the first half of 2023. But canal revenue in Cairo has already dropped by 40% in the first 11 days of January, according to the chairman of the Suez Canal Authority. “That puts it at real risk of running out of dollars, which would push its government into default and its budget into disarray,” the Economist reported.

The West Bank’s economic crisis could fuel more violence

Source: NPR

Israeli authorities, citing unsafe conditions, barred roughly 100,000 Palestinian workers in the West Bank from crossing into Israel for work following Hamas’ Oct. 7 attack. This has dealt “a huge financial blow” to the territory, where cross-border workers’ wages account for about a third of the Palestinian economy, NPR reported. The Palestinian Authority, which governs Gaza and the West Bank, has also slashed the salaries of its workers and is losing favorability among residents, while Hamas’ popularity in the West Bank is surging. Observers worry that such dire economic straits could lead to more violence. “The West Bank is currently boiling,” said a Ramallah-based academic, “just waiting for the spark that could eventually lead to a major explosion.”

Financial analysts worry about the regional conflict’s global impact

Sources: The U.S. Federal Reserve, The New York Times, CNN

The U.S. Federal Reserve is monitoring the Middle East and Red Sea conflict closely – fearing that “geopolitical tensions” could “pose important risks to global economic activity,” Jay Powell, the chair of the central bank, said in a recent speech. “The Middle East is becoming a wild card for the global economy,” according to The New York Times’ DealBook newsletter, as observers watch for rising gas prices that could push up inflation and disrupt central banks’ efforts to reduce prices. But other analysts are more optimistic, citing the weakening global demand for oil combined with a surplus of supply, CNN reported. Even though oil tankers avoiding the Red Sea are being forced to take a longer route, customers are still getting the same volumes of oil, an analyst told the network.