Warning bells went off in financial markets the instant the extent of the deadly Hamas attack on Israel became apparent – and it is easy to see why.
One of the rules of thumb of geopolitics is that recessions are sparked by a sharp jump in oil prices, and the cost of crude is sensitive to events in the Middle East.
Little wonder then that the war between Israel and Hamas has meant scenario planners have been working to answer the question being asked by finance ministers and central bank governors from around the world: how bad could it get?
Kristalina Georgieva, the managing director of the International Monetary Fund, said last week that analysts at her organisation had been “thinking the unthinkable” in an attempt to plan for the next big shock to the global economy.
In truth, the risk of what at present is a localised – if horrific – conflict in Gaza – turning into something far more serious does not really fall into the category of the “unthinkable”. There are plenty of historical precedents.
It was presumably no coincidence that Hamas chose a week last Saturday to launch an attack, since it was – almost to the day – the 50th anniversary of the start of the Yom Kippur war, a joint assault on Israel by Syria and Egypt that brought the global postwar boom to an end.
Israel’s counteroffensive in 1973 prompted an oil embargo from the Opec cartel, which resulted in a fourfold increase in the price of crude, spiralling consumer prices and a huge increase in business costs. Higher inflation was rapidly followed by higher unemployment. A new word was coined to describe a mixture of a soaring cost of living and a collapse in growth: stagflation.
Opec is no longer such as dominant a force and the global economy is not as dependent on oil as in the early 1970s. The Center on Global Energy Policy at Columbia University in New York noted that five decades ago, the world used a little less than one barrel of oil to produce $1,000 worth of gross domestic product. By 2019, the figure was 0.43 barrels – a 56% decline. “Oil has become a lot less important and humanity has become more efficient in making use of it,” the research centre said.
That said, oil still matters, which is why events in the Middle East are being so carefully monitored.
The first scenario – and the best-case one for the global economy – is that the war is contained to an Israeli ground assault on Gaza Strip. In those circumstances, oil prices would stabilise at about their current level of $93 (£76) a barrel and could soon start to fall back. The IMF estimates that a sustained 10% increase in oil prices shaves 0.15 percentage points off global economic growth and adds 0.4 points to inflation in the following year. On the world’s commodity markets, the cost of a barrel of crude is now about 10% higher than it was before the Hamas attack.
The second scenario involves a broader regional conflict, starting with fighting on Israel’s northern border with Iranian-backed Hezbollah forces in Lebanon, but eventually dragging Iran into the conflict. The arrival of US carrier groups in the eastern Mediterranean suggests Washington is making contingencies for this.
Nicholas Farr, an economist at the research firm Capital Economics, said: “Iranian-backed Hezbollah has exchanged missile fire with Israel from Lebanon, which has the potential to open up a new front in the conflict. If Iran were drawn into the war this would create major global risks by disrupting energy supplies and pushing up oil prices. Natural gas prices could be affected too if there’s disruption to LNG [liquefied natural gas] exports.”
Writing for the OMFIF thinktank, the economist and crossbench peer Meghnad Desai, said he could envisage a broader regional conflict in which Lebanon, Egypt and Syria, as well as other Arab states became embroiled. In those circumstances, Lord Desai said the oil price could approach $150 a barrel, sending inflation back into double digits in the US and Europe. The threat of global recession would prompt central banks to cut interest rates and restart quantitative easing programmes.
For oil to reach $150 a barrel, the flow of crude on to global markets would need to be interrupted, probably by the closure of the strait of Hormuz through which almost 20% of the world’s supply flows daily. Bjarne Schieldrop, the chief commodity analyst at the Nordic financial services group SEB, said: “The fear is that the conflict might spiral out of control and eventually lead to real loss of supply, with Iran being most at risk.” According to Schieldrop, geopolitical risk premiums of the sort seen in recent days tend to be short-lived unless actual supply disruptions occur.
Saudi Arabia, the world’s biggest oil exporter and Opec linchpin will have a critical role to play. It has an interest in keeping the cost of crude high, but not so high that it causes a deep global recession because that would result in oil prices collapsing. There will be pressure on Riyadh – from Washington and elsewhere – to keep oil flowing.
Finally, there is the doomsday scenario – sketched out by the historian Niall Ferguson – in which China takes advantage of the crisis to impose a blockade on Taiwan and by doing so escalates a regional conflict in the Middle East into a third world war. Even if fought by conventional methods, a military conflict between the world’s two biggest economies would lead to a severing of global supply chains, a blow to confidence and crashing asset prices. It would have catastrophic economic consequences, up to and including a second Great Depression.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
