October 20, 2023 - 10:10am

When Hamas attacked Israel, analogies to the 1973 Yom Kippur War were quickly raised. But while the military and intelligence failures that preceded this war brought back bitter memories of the complacency that preceded the earlier conflict, the comparisons don’t stretch to the economy. 

The 1973 war triggered a global recession that devastated Western economies, ending the quarter century-long golden age of rapid growth and rising incomes. But today, to judge from the price action in the markets, war in Israel has barely moved the needle. 

Immediately after the Hamas atrocities, government bonds rallied as investors rushed to the safety of US Treasury paper. But the rally didn’t last the week, interest rates resuming their relentless upward march. Meanwhile other haven assets that normally rise during periods of global anxiety, like the yen and gold, have barely budged. Even oil prices, which rose a few dollars due to supply concerns, are still well off the highs they set late last month.

It would seem investors are saying, “nothing to see here folks.” That’s partly down to the changed geopolitics of the Middle East. The region’s governments are expressing public fury at Israel’s response, but in large measure this is simply a way to tamp down the anger of their publics. Several of them have improved relations with Israel, have no interest in war, and in private would be just as happy to see the tail end of Hamas.

Not the Iranians, of course, who sponsor Hamas and the Lebanese Hezbollah militia. But while Iran makes noises about joining the war, it doesn’t have an obvious interest in doing so. The current situation, with Israel unsettled, suits it just fine. War with Israel and its US ally, on the other hand, would devastate Iran at a time the Islamic regime is already battling internal disorder. 

Barring a massive escalation of Israel’s operation, such as a wholesale occupation of Gaza, this tense stability will likely endure. It’s precisely to forestall such an operation that Western leaders, led by Joe Biden, have been taking turns tying up Benjamin Netanyahu with their visits. 

Either way, the world economy has changed a lot since 1973. It’s much less dependent on oil than it was then, especially in the West. Between the reduced energy intensity of our economies and the progress of decarbonisation, household and corporate budgets are much less sensitive to energy prices.

But that doesn’t mean Western economies don’t face difficulties, which events in the Middle East could exacerbate. Economies are slowing, and will continue to do so. Inflation, however, remains stubbornly sticky, and even a small uptick in energy prices could help slow the recent disinflation we have seen. So interest rates look set to keep rising, and that could eventually cause asset markets to crash

But none of that results from the war. It’s the result of a continued unwinding of a decade of cheap money, that was then worsened by austerity, and whose combined effects aggravated economic imbalances while doing nothing to stir sluggish economies back to life.

A rising oil price could now further complicate the task of Western banks in bringing down inflation. But most of the mess they have to clean up is the one for which they and their governments were responsible. Things could still get ugly, regardless of how events play out in Israel. But whereas in 1973 the threat to Western economies came from distant lands, today the danger is home-grown.

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).