Mohamed Aly El-Erian, chief economic adviser at Allianz SE, during an interview with Bloomberg Television in London, Britain, on Monday, September 25, 2023. El-Erian spoke alongside former British Prime Minister Gordon Brown and economist Michael Spence, his colleague -Authors for their book Permacrisis: A Plan to Fix a Fractured World. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

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As the war between Israel and Hamas enters its fourth week, risks to the global economy are increasing, economist Mohamed el-Erian said on Monday.

The conflict intensified on Monday after the Israeli military announced that it had expanded its ground offensive in Gaza and was continuing its attack in response to the Oct. 7 terrorist attacks by the militant group Hamas.

El-Erian, the alliance’s chief economic adviser, said the longer the fighting lasts, the greater the chance it will escalate into a regional conflict with implications for global financial markets.

“The longer this conflict continues, the more likely it is to escalate,” el-Erian told CNBC’s Dan Murphy during a panel discussion at the AIM summit in Dubai.

“The higher the risk of escalation, the higher the risk of contagion to the rest of the world in economic and financial terms,” he continued.

El-Erian said such a contagion would exacerbate the global economy’s already pervasive problems, including stagnant growth, stubbornly high inflation and the general fragmentation of markets.

“This conflict in some ways exacerbates all of the existing and already significant challenges,” he said.

The impact on global markets in response to the outbreak of war was initially limited, as investors initially assumed that the conflict had been contained. However, the prospect of regional spillover to other players such as Iran and Lebanon has created a sense of unrest in markets.

Oil was particularly volatile amid fears that an escalation could restrict supplies from the energy-rich region. Oil prices rose sharply on Friday after Israel said its troops would expand ground operations, but fell on Monday as investors awaited the Federal Reserve’s policy meeting on Wednesday.

Kristalina Georgieva, head of the International Monetary Fund, on Wednesday described the worsening Israel-Hamas conflict as another cloud on the horizon of an already bleak economic outlook.

“The economic outlook for the epicenter of the war is dire,” she said. “[There will be] negative impact on neighbors: on trade channels, on tourism channels, insurance costs.”

Peace talks in the Middle East are stalling

The October 7 terrorist attacks carried out by Hamas came as Israel took steps to normalize diplomatic relations with its Arab neighbors, including Saudi Arabia.

Asked what the ongoing conflict meant for those ambitions, el-Erian said the prospect had become both bleaker and more urgent.

“People look at this and feel a sense of desperation that I’ve never seen before,” he said.

“The longer it takes [the conflict] continues, the more relevant your question will be, and it really should be put to policymakers.”

El-Erian’s comments echo those of World Bank President Ajay Banga, who told CNBC last week that the conflict had made the goal of regional cooperation in the Middle East much more difficult.

“We have been working towards a more peaceful Middle East and many countries in this region have begun to talk to each other about the possibility of advancing a new platform of togetherness,” Banga said on Tuesday. “I think it’s clearly going to take a while for this to work out one way or another.”

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