The situation in Israel and Gaza is horrifying, and it appears that a ground war in a densely populated urban area is only days away, promising further casualties and suffering in the coming weeks, months, and possibly years. The sadness is palpable.

Of course its natural to also wonder what a war in Israel/Gaza might mean to the global economy and, in particular, your investment or retirement portfolio. 

While this conflict could conceivably expand beyond Israel/Gaza, it is important to highlight that this does not currently appear to be a re-run of the 1973 Arab Israeli war, which saw Arab countries line-up against Israel with OPEC oil supply boycotts triggering a fourfold increase in oil prices, and ultimately a severe recession.

Far from smooth, most Arab countries today have much better relations with Israel, at a time when demand for oil is weakening. So for now, the majority of Arab countries are remaining on the sidelines, presumably waiting to see Israel's next move. The main risk to the global economy would come if Iran, which backs Hamas and Hezbollah, is drawn into the conflict. Beyond the obvious downsides of a wider Middle East war, from an economic perspective, this could also threaten Iran's own oil production (the flow of oil through the Strait of Hormuz represents 20% of world oil consumption flows), or even Saudi production (as Iran did in 2019). Hopefully cool heads will prevail.

This week the market reaction to the conflict has been modest with shares little affected and oil prices up 4% but still below recent highs. And if the conflict stays contained to Israel, the impact should be minimal. If not, then economic conditions would likely deteriorate as oil prices would likely climb. You may recall, 18 months ago, when oil prices surged in the early stages of the Ukraine war, consumers managed the hikes reasonably well because they had (1) pent up demand and savings buffers after the lockdowns and (2) monetary policy was very accommodative (low interest rates, easy money), and so higher oil prices at the time merely added to inflationary pressures with minimal impact to consumers.

This time around is very different – the Covid reopening boost is behind us, monetary policy is tight and household budgets are under severe strain, so any rise in petrol prices is more likely to act as a tax on spending. And leading up to the attack, China's sluggish economy, US politics, and rising bond yields were already weighing down investor confidence.

Should you be worried?

I'm naturally an optimist, but every now and then it's ok to be little cautious, and I do believe this is one of those times. That said, as we move into the seasonally optimistic time of the year, the outlook for shares still remains relatively positive at this point, as inflation continues to fall (taking pressure off interest rates in 2024). Residential property also looks promising in some quarters. And if we do have a recession somewhere along the way, it's likely to be mild one. 

So by all means be mindful of the short term risks and volatility as the war in Israel unfolds, just don't let this derail your plans or paralyse you with fear - we've been here many times before. But if in doubt, call me personally to discuss your situation.

Rick Maggi, CFP