The risk of broader instability remains
On 20 July 2024, Israeli warplanes struck oil facilities and a power plant in the Yemeni port of Hodeidah, which is held by the Houthi movement. Six people were killed and close to 100 wounded, according to local medics. The strikes came in response to a Houthi drone attack on Tel Aviv on 19 July, which killed one person and injured eight. On the day following the raid on Hodeidah, Israel announced that it had successfully intercepted a volley of missiles fired at the city of Eilat from Yemen.
Business Implications
- Israel: Businesses should plan for a slow and inconsistent recovery in Israeli consumer demand through H2 2024 and H1 2025. However, they should ensure they are prepared for the possibility of a sharp escalation in regional instability, which would rapidly weaken consumer confidence and likely push the Bank of Israel to double-down on its already hawkish approach to interest rate cuts as it works to head off excess currency depreciation. A significant deterioration in security could also lead to a spike in the number of Israelis exiting the country temporarily or permanently, reducing the addressable market size. Firms should plan for possible power outages in the event of a broader escalation, with Iranian-backed groups likely to target Israel’s power infrastructure and offshore gas fields.
- Regional: On the broader regional front, executives should prepare for disruptions to Red Sea shipping to continue over the near term, with heightened freight costs and risk premiums persisting into early 2025. A significant escalation of regional instability could broaden the appeal of existing consumer boycotts of certain Western brands, particularly in Jordan and Egypt. Finally, a deterioration in regional security could also sharply reduce inbound tourist arrivals, impacting overall consumer demand.
Israeli – Yemeni Base Case:
FrontierView does not expect a significant escalation in violence between Israel and the Houthis. Israeli air defenses usually succeed in downing most missiles and drones fired at Israel from Yemen. The Houthis’ primary backer, Iran, has displayed a reluctance to escalate its tit-for-tat confrontation with Israel. Drone and missile attacks by Iranian proxy groups, including the Houthis and Lebanese Hezbollah, will remain keyed to the intensity of Israel’s military campaign in Gaza. A ceasefire of considerable duration, or at least a transition by Israel to more calibrated and less frequent strikes that are less destructive of civilian lives and infrastructure, would likely result in a reduction in the frequency of missile and drone attacks on Israel by Iran-aligned groups in the region.
Houthi military action against Red Sea shipping is likely to persist through 2024, and the group has proven resilient against US strikes meant to degrade its capabilities. Broader cost disruptions in global shipping markets are likely to last into Q1 2025 at the earliest.
Downside Scenario:
An escalation of current cross-border hostilities between Israel and Hezbollah into an all-out war would likely result in larger and more frequent drone and missile attacks on Israeli targets by Iranian proxies in the region, including the Houthis. Our downside scenario envisions significant damage to civilian infrastructure and property within Israel, yielding sharper impacts on economic activity than those seen in the early stages of the war in Gaza. In a downside scenario, the de facto blockade of Israel’s Red Sea port at Eilat by Houthi activities would be extended, and the modest and tentative normalization of air traffic to and from Tel Aviv would be quickly reversed.
FrontierView’s downside scenario envisions significantly more severe impacts on overall economic activity in the MENA region compared to what has been registered so far, particularly in frontline states such as Lebanon, Jordan, and Egypt. In an extreme downside scenario, the Houthis could restart attacks on Saudi Arabia and the UAE, which have been relatively immune from the broader impacts of the war in Gaza.
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