In the Red Sea, attacks on merchant ships by Iran-backed Houthi fighters continue to disrupt a key trade route and raise transportation costs. The danger of escalation there and around trouble spots in Lebanon, Iraq, Syria, Yemen and now also in Iran and Pakistan is increasing every day.
Despite the staggering death toll and staggering misery of the violence in the Middle East, the broader economic impact has so far been largely contained. Oil production and prices, a key driver of global economic activity and inflation, have returned to pre-crisis levels. International tourists are still flying to other Middle Eastern countries such as Saudi Arabia, the United Arab Emirates and Qatar.
But for Israel's neighbors – Egypt, Lebanon and Jordan – the economic damage is already severe.
An estimate by the United Nations Development Program estimates that the Israel-Gaza war cost the three countries $10.3 billion, or 2.3 percent of their total gross domestic product, in just three months. An additional 230,000 people in these countries are expected to fall into poverty.
“Human development could decline by at least two to three years in Egypt, Jordan and Lebanon,” the analysis warned, citing refugee flows, rising public debt and declines in trade and tourism – a key source of revenue, foreign exchange and employment.
That conclusion echoed an update last month from the International Monetary Fund, which said it would certainly lower its forecast for the most vulnerable countries when it releases its global economic outlook later this month.
The recent economic setbacks couldn't come at a worse time for these countries, said Joshua Landis, director of the Center for Middle East Studies at the University of Oklahoma.
Economic activity in the Middle East and North Africa was already declining, falling from 5.6 percent last year to growth of 2 percent in 2023. Lebanon is embroiled in one of the worst economic and financial crises in more than a century and a half, as the World Bank calls it. And Egypt was on the verge of bankruptcy.
Since Hamas militants attacked Israel from Gaza on October 7, about 25,000 Palestinians have been killed by Israel, according to the Gaza Health Ministry. The strip has suffered widespread destruction and devastation. In Israel, where Hamas attacks killed about 1,200 people and 240 were taken hostage, officials said, life was turned upside down: hundreds of thousands of citizens were called up for military service and 200,000 were expelled from border areas.
In Jordan, Lebanon and Egypt, uncertainty over the course of the war is sapping consumer and business confidence, which IMF analysts say will likely lead to a decline in spending and investment.
Egypt, the Arab world's most populous country, has still not recovered from increased costs of vital imports such as wheat and fuel, a decline in tourism revenue and a decline in foreign investment caused by the coronavirus pandemic and the war in Ukraine.
Waste government spending on flashy megaprojects and weapons caused Egypt's debt to skyrocket. As central banks around the world raised interest rates to curb inflation, debt payments soared. Rising prices in Egypt continue to eat away at household purchasing power and companies' expansion plans.
“Nobody wants to invest, but Egypt is too big to fail,” Landis said. He explained that given the country's strategic and political importance, the United States and the IMF were unlikely to allow the country to default on its $165 billion in foreign loans.
The decline in shipping traffic entering the Red Sea from the Suez Canal is the latest blow. Between January and August, Egypt averaged $862 million a month in revenue from the canal, which handles 11 percent of global maritime trade.
James Swanston, emerging markets economist at Capital Economics, said that according to the head of the Suez Canal Authority, traffic was down 30 percent this month from December and revenue was 40 percent below 2023 levels.
“That’s the biggest spillover effect,” he said.
For these three struggling economies, the decline in tourism is particularly alarming. According to the IMF, tourism accounted for 35 to nearly 50 percent of total goods and services exports in Egypt, Lebanon and Jordan in 2019
As of early January, confirmed tickets for international arrivals to the broader Middle East region for the first half of this year were 20 percent higher than last year, according to ForwardKeys, a data analytics firm that tracks global air travel reservations.
But the closer the fighting, the greater the decline in travelers. Tourism to Israel has largely evaporated, further straining an economy that has been upended by a large-scale war.
In Jordan, flight bookings fell by 18 percent. In Lebanon, where Israeli troops are fighting Hezbollah militants along the border, bookings fell 25 percent.
“Fears of further regional escalation are casting a shadow over the travel outlook in the region,” said Olivier Ponti, vice president of insights at ForwardKeys.
In Lebanon, travel and tourism have so far contributed a fifth of the country's annual gross domestic product.
“The No. 1 location in Lebanon is Baalbek,” said Hussein Abdallah, general manager of Lebanon Tours and Travels in Beirut. The 2,000-year-old Roman ruins are so spectacular that visitors suspect that genies built a palace there for the Queen of Sheba or that aliens built it as an intergalactic landing site.
Now, Mr. Abdallah said, “it is completely empty.”
Mr Abdallah said his bookings had fallen by 90 per cent since October 7 compared to last year. “If the situation continues like this,” he said, “many tour operators in Beirut will go out of business.”
Travel to Egypt also fell in October, November and December. Mr. Landis of the Middle East Center in Oklahoma mentioned that even his brother had canceled a planned trip on the Nile and opted for a vacation in India instead.
Khaled Ibrahim, an adviser to Amisol Travel Egypt and a member of the Middle East Travel Alliance, said there was a flood of cancellations after the attacks began. Like other tour operators, it offered discounts to popular destinations like Sharm el-Sheik on the southern tip of the Sinai Peninsula, and occupancy reached about 80 percent of normal.
He is less confident about saving the rest of the peak travel season. “I can say that this winter, January to April, will be quite challenging,” Mr. Ibrahim said from Medina, Saudi Arabia, where he was leading a tour. “Maybe business will drop to 50 percent.”
Jim Tankersley contributed reporting from Davos, Switzerland.