The Israel-Hamas war could have a significant impact on economic growth and inflation in the euro zone unless energy price pressures remain contained, according to Goldman Sachs.

The ongoing hostilities could affect European economies via lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence, Europe Economics Analyst Katya Vashkinskaya highlighted in a research note Wednesday.

Concerns are growing among economists that the conflict could spill over and engulf the Middle East, with Israel and Lebanon exchanging missiles as Israel continues to bombard Gaza, resulting in massive civilian casualties and a deepening humanitarian crisis.

Although the tensions could affect European economic activity via lower trade with the Middle East, Vashkinskaya highlighted that the continent’s exposure is limited, given that the euro area exports around 0.4% of the GDP to Israel and its neighbors, while the British trade exposure is less than 0.2% of the GDP.

She noted that tighter financial conditions could weigh on growth and exacerbate the existing drag on economic activity from higher interest rates in both the euro area and the U.K. However, Goldman does not see a clear pattern between financial conditions and previous episodes of tension in the Middle East

The most important and potentially impactful way in which tensions could spill over into the European economy is through oil and gas markets, Vashkinskaya said.

“Since the current conflict broke out, commodities markets have seen increased volatility, with Brent crude oil and European natural gas prices up by around 9% and 34% at the peak respectively,” she said.

Goldman’s commodities team assessed a set of downside scenarios in which oil prices could rise by between 5% and 20% above the baseline, depending on the severity of the oil supply shock.

“A persistent 10% oil price increase usually reduces Euro area real GDP by about 0.2% after one year and boosts consumer prices by almost 0.3pp over this time, with similar effects observed in the U.K.,” Vashkinskaya said.

“However, for the drag to appear, oil prices must remain consistently elevated, which is already in question, with the Brent crude oil price almost back at pre-conflict levels at the end of October.”

Gas price developments present a more acute challenge, she suggested, with the price increase driven by a reduction in global LNG (liquefied natural gas) exports from Israeli gas fields and the current gas market less able to respond to adverse supply shocks.

“While our commodities team’s estimates point to a sizeable increase in European natural gas prices in case of a supply downside scenario in the range of 102-200 EUR/MWh, we believe that the policy response to continue existing or re-start previous energy cost support policies would buffer the disposable income hit and support firms, if such risks were to materialize,” Vashkinskaya said.

Bank of England Governor Andrew Bailey told CNBC on Thursday that knock-on effects of the conflict on energy markets posed a potential risk to the central bank’s efforts to rein in inflation.

“So far, I would say, we haven’t seen a marked increase in energy prices, and that’s obviously good,” Bailey told CNBC’s Joumanna Bercetche. “But it is a risk. It obviously is a risk going forward.”

Oil prices have been volatile since Hamas launched its attack on Israel on Oct. 7, and the World Bank warned in a quarterly update on Monday that crude oil prices could rise to more than $150 a barrel if the conflict escalates.

General consumer confidence is the final potential channel for spillover affects, according to the Wall Street bank, and Vashkinskaya noted that the euro area experienced a substantial deterioration in the aftermath of Russia’s invasion of Ukraine in March 2022.

The same effect has not been historically observed alongside outbreaks of elevated tensions between Israel and Hamas, but Goldman’s news-based measure of conflict-related uncertainty reached record highs in October.