War and The Adverse Impact on Israel’s Economy

The ongoing conflict between Israel and Hamas, if it continues for a long time, as it seems it will, seeing Israel’s renewal of strikes in Gaza after the end of the recent truce, could have a calamitous effect on Israel's economy.

Israel had always been considered a resilient economy, which had survived and bounced back after earlier conflicts. But this time the situation might end up being quite different.

The economy had already been shaken before the war with the large protests and demonstrations following Netanyahu’s move to overhaul the judicial system making it subservient to the government. There was a 60 percent decline in foreign investment and erosion of the currency’s value combined with wide swings in the Israeli stock market.

The Israeli economy had a growth rate of 6.5 percent in 2022. Prior to the outbreak of hostilities with Hamas, the Bank of Israel had figured the economy could grow at 3.4% in 2023.

In the current grim scenario, the Bank had calculated that a sustained and quick recovery from the war, if it ended in 2024, could see the economy grow at 2.2 percent in 2024. But if the war continued into 2025 the Bank had estimated that growth would stagnate at a mere 0.2%.

Israel has had one of the highest living standards in the region. Salaries per capita in 2022 were estimated at USD 52,173, by the IMF. This despite the fact that 25% of Israelis were said to live in poverty and there was an unequal distribution of wealth.

Real estate prices and costs of living have been high in Israel. There had been a mild impact from the Russia-Ukraine war since Israel had been self-sufficient in gas production but investment in the natural gas sector would be affected by the conflict.

Production at a major Israeli offshore natural gas field has been shut down. Covid 19 had also impacted on the economy

Israel’s Central Bank had estimated that the war with the Palestinians could cost Israel about $53 billion between 2023 and 2025. More than half that amount would be for increased defence spending.

Usually, Israel spends over 4 percent of gross domestic product on the military, amounting to $23.4 billion last year. It also receives $3.8 billion in annual aid from the United States, used mainly to buy American weapons.

The Bank of Israel has about $200 billion in foreign exchange reserves, close to 40 percent of the country’s gross domestic product. Since the conflict, the Central Bank was said to have earmarked $30 billion in foreign exchange to support Israel’s currency, the shekel, which had fallen to an eight-year low.

The largest contributors to Israel’s economy have been tourism and cutting-edge high technology and services exports. Both have been adversely affected by the conflict. According to the World Bank, industry as a whole contributed 17.2% of GDP and employed 17% of the workforce.

Because of the war Israel’s technology industry, a driver of growth, has abruptly slowed. Existing high-tech companies have been shackled with 360,000 reservists, who were employed in various jobs in peacetime, called to serve in the war.

Companies and profit-making businesses are finding it difficult to continue. The situation has also affected the flow of investment from overseas. International hi-tech companies like Intel, Microsoft, Cisco, IBM and Apple had established R&D centres in Israel. Now investing in Israel does not appear attractive and the inflow of foreign funds is drying up.

Tourism, a sector that contributed three percent of Israel’s GDP and indirectly provided 6 percent of total jobs has suffered greatly. Hotels are lying empty with many complaining of very low occupancy and that also of Israeli citizens move inland away from the border.

Cruise ships are avoiding Israel’s shores and people have been cancelling visits. Major airlines had halted flights to and from the country, including for cargo.

The war has a direct effect on domestic food production. Agriculture accounts for only a small percent of employment and Israel has always had to import foodstuffs because local production is not sufficient to meet the needs of the country.

The agriculture industry was reported to have a shortfall of 10,000 farmers. A proposal from the Israeli Ministry of Agriculture to hire 8,000 from the West Bank, Palestinian women of all ages and men at 60 or older, was shot down by National Security Minister Itamar Ben Gvir, the most vocal far-right leader. In southern Israel, after October 7, farms have become a vast army staging area and there are no farmhands.

Economists are pushing the government to reprioritize the budget. Three-hundred Israeli economists were said to have written an open letter to the government and called on Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich to urgently implement a range of measures however unpalatable they might find them. They have asked that the money kept aside for educational programs for the ultra-orthodox communities be redirected to military expenditure.

A group of global venture capitalists were said to have started an effort billed as the Iron Nation to prevent budding Israeli startups, for which Israel was well known, from bankruptcy and prevent the country’s economy from collapsing under pressure because of the ongoing conflict in Gaza. Some of the Israeli companies have sought $500,000 to $1.5 million to keep their operations intact.

There is little likelihood, given the military’s determination to exterminate Hamas, that the war would end soon. Reports from Gaza appear to suggest that a new generation of Palestines is already ready to pick up arms and continue the fight despite the pitiful condition they are in.

In Israel, unless Benjamin Netanyahu is ousted and a more flexible leader takes over, the army’s determination to continue the war is unlikely to be shaken as long as defence spending keeps increasing. The economy and the citizens of Israel will eventually have to live with the consequences of their refusal to grant the Palestinians their own state.