Top economists say investors are “a frog in boiling water” after dismissing the Iran-Israel conflict too quickly

According to top economist Mohamed El-Erian, there are major disagreements between investors and security experts over how they assess the risks of the Iran-Israel conflict, which could still pose a major shock to global growth and financial markets.

In an editorial in the Financial Times on Friday, the alliance's chief economic adviser noted that “both parties crossed several lines” when Iran and Israel directly attacked each other for the first time.

Last weekend, Iran launched hundreds of drones and missiles at Israel, having used proxy militias to attack the country in the past. And early Friday, an Iranian base was hit by airstrikes that U.S. officials said were an Israeli attack. Israel had previously attacked Iran-linked targets in third countries such as Syria.

“Despite all this, the market reaction has been relatively muted and subdued,” El-Erian wrote. “Rather than pricing in the market impact of a sustained escalation in geopolitical threats and a greater risk of significantly higher oil prices in the long term, traders quickly blunted initial moves in many asset prices.”

In fact, crude oil prices are below levels before Iran's attack on Israel, after briefly rising sharply on reports of an impending attack and immediately following news of the airstrike on the Iranian base. This suggests that financial markets see little risk of the conflict escalating for the time being.

In contrast, some security experts warn of a possible deterioration in the situation, although there are signs that both sides may have taken a cautious approach.

El-Erian warned that further escalation between Iran and Israel would weaken fragile global growth, fuel inflation and place further strain on central banks and governments that already have limited ability to respond to new shocks.

In particular, the Chinese and European economies, which are heavily dependent on energy imports, would be hit hard by higher oil prices. And US inflation would remain stubborn, further delaying the Fed's rate cuts. Additionally, the U.S. dollar would rise as investors flock to safe havens, and borrowing costs would rise as markets price in additional risks.

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“When I compare the market reaction to the views of most national security experts, I remember the story of the frog in boiling water,” El-Erian added, referring to the fable of a frog that ended up in a pot boiled with water that gradually warms up.

The Iran-Israel conflict has “permanently raised geopolitical temperatures in the region,” but financial markets have brushed that aside as the recent back-and-forth has not yet resulted in major casualties or physical damage, he said.

“Given that this is a region prone to miscalculation, lack of understanding of adversaries and accidents in implementation, this may well prove to be an overly complacent response,” El-Erian warned.

This story was originally published on Fortune.com