The Israeli economy has witnessed a decline in the performance of its various sectors, including tourism and agriculture, in addition to rising military costs that have burdened the public budget. The government was also forced to support residents of the affected areas and provide temporary accommodation and care for the displaced, which increased the financial burden at a time of increasing security and economic challenges.
The shekel also declined against major currencies and investor confidence in the Israeli market deteriorated, which led to a lowering of the country’s credit rating by international rating agencies. These developments came in light of a state of reverse migration and a decline in economic activity, in addition to the repeated call-up of reserve forces, which negatively affected vital sectors such as industry and services.
In late September, with the expansion of the war that Israel has been waging for nearly a year, and its credit rating being lowered again, Finance Minister Bezalel Smotrich said that Israel’s economy, despite the pressures it is suffering from, has the ability to withstand.
Smotrich said on September 28 (that is, the day after Hezbollah leader Hassan Nasrallah was killed in Israeli air strikes in the Lebanese capital, Beirut), that “Economy of Israel “It bears the burden of the longest and most expensive war in the country’s history,” raising fears that the current tensions could turn into a full-fledged conflict. Smotrich added: “The Israeli economy is a strong economy that attracts investments even today,” according to an extensive CNN report viewed by the “Sky News Economy” website. Arabic” on it.
Nearly a year after the war that broke out on October 7, 2023, Israel continues to move forward on multiple fronts: launching a ground offensive against Hezbollah in Lebanon, carrying out air strikes in Gaza and Beirut, and threatening retaliation for the ballistic missile attack launched by Iran shortly before… days.
As the conflict spreads to the broader region, the economic costs will also worsen, both for Israel and other countries in the Middle East, according to the report.
On October 1, former Israeli Central Bank Governor Karnit Flug told CNN: “If the recent escalations turn into a longer and more intense war, this will impose a heavier tax on economic activity and growth in Israel.”
According to the report, it is possible that the Israeli economy will contract further, based on the worst estimates of the Institute for National Security Studies at Tel Aviv University.
Even in a less severe scenario, the researchers also see that Israel’s per capita GDP – which in recent years has surpassed that of the UK – will fall this year, with Israel’s population growing faster than the economy and living standards falling.
- Before the events of October 7 and the ensuing war between Israel and Hamas, the International Monetary Fund expected that the Israeli economy would grow by 3.4 percent this year.
- Now, economists’ expectations range between 1 and 1.9 percent.
- Growth next year is also expected to be weaker than previous expectations.
But the Israeli central bank is not in a position to cut interest rates to revive the economy because inflation is accelerating, driven by rising wages and increased government spending to finance the war.
Long-term economic damage
Last May, the Bank of Israel estimated that costs resulting from the war would reach NIS 250 billion (US$66 billion) by the end of next year, including military expenses and civilian expenses, such as housing for thousands of Israelis forced to flee their homes in the north and south. This is equivalent to about 12 percent of Israel’s gross domestic product.
It appears that these costs will rise further as the fight against… Iran And its agents, and with Hezbollah in Lebanon, which increases the government’s defense bill and delays the return of Israelis to their homes in the north of the country, according to the aforementioned report.
The Israeli Finance Minister expressed confidence that the Israeli economy will rebound once the war ends, but economists worry that the damage will last longer than the conflict ends.
Flug, a former governor of the Bank of Israel and vice president of research at the Israel Democracy Institute, says there is a risk that the Israeli government will reduce investments in order to free up resources for defense. “This would reduce potential future growth,” she added. Researchers at the Institute for National Security Studies also seem pessimistic.
In a report issued in August, experts said that a withdrawal from Gaza and calm on the border with Lebanon would leave the Israeli economy in a weaker position than it was before the war. They added: “Israel is expected to suffer long-term economic damage regardless of the outcome.”
They added: “The expected decline in growth rates in all scenarios compared to pre-war economic expectations and the increase in defense spending may exacerbate the risk of a recession reminiscent of the lost decade after the (1973 October War).”
Likewise, potential tax increases and non-defense spending cuts – which Smotrich has already proposed – to fund what many expect to be a permanently expanded military, could hurt economic growth.
Technology sector
Flug warned that such measures, coupled with a weakened sense of security, could also lead to an exodus of highly educated Israelis, especially technology entrepreneurs.
“It doesn’t have to be in very large numbers, because the technology sector is very dependent on a few thousand of the most innovative, creative and entrepreneurial individuals,” she said of the sector, which represents 20 percent of Israel’s economic output.
According to the report, the widespread departure of high-income taxpayers would further deteriorate Israel’s financial situation, which has been severely damaged by the war. The government has postponed the publication of its budget for next year as it struggles with competing demands that make it difficult for it to balance its books.
- The conflict caused Israel’s budget deficit — the difference between government spending and revenues, mostly from taxes — to double to 8 percent of GDP, from 4 percent before the war.
- Government borrowing costs have risen dramatically, as investors demand higher yields to buy Israeli bonds and other assets.
- Multiple credit rating downgrades by Fitch, Moody’s and Standard & Poor’s for Israel are likely to increase the country’s cost of borrowing further.
In late August — a month before Israel carried out strikes on the Lebanese capital and a ground incursion against Hezbollah in the south of the country — the Institute for National Security Studies estimated that only one month of “high-intensity warfare” in Lebanon against Hezbollah, with “intense attacks” in the opposite direction Damage to Israeli infrastructure, could cause Israel’s budget deficit to rise to 15 percent and its gross domestic product to shrink by up to 10 percent this year.
In exclusive statements to the “Eqtisad Sky News Arabia” website, international relations expert, Dr. Ayman Samir, confirmed that Israel has suffered significant economic losses since the beginning of the war, and the estimated numbers show the extent of the enormity that has befallen the Israeli economy.
Samir pointed out several main aspects behind these losses:
- The Gaza Strip envelope: Israel has about 100,000 residents of the north, and the government provides care and accommodation for them. In addition, many Israelis left their homes in the Gaza Strip area after the start of the war and have not returned yet, which constitutes a major economic burden on Israel.
- Israeli Ports: Israeli ports, including Haifa Port, were among the most active in the Eastern Mediterranean region. With the targeting of Haifa Port over the past year, the proportion of Israeli exports and imports declined, especially with the increase in the pace of the conflict with Hezbollah, which is targeting the port.
- Reserve forces: The Israeli army relies on a large number of reserve forces, which include young people working in companies and factories. With repeated call-ups to war in Gaza and southern Lebanon, Israel is forced to mobilize further, negatively affecting the economy due to labor shortages in Israeli companies.
- Military spending: Israel uses high-spending types of weapons and munitions, such as the drones and missiles used in the Iron Dome system. This unprecedented military spending has a direct impact on the Israeli economy, especially with the war lasting for a year, which exceeds previous wars that lasted for several days.
- Reverse migration: The war caused many Israelis to leave and return to their countries of origin, depriving Israel, with a population of about 9.5 million, of a large percentage of its population.
Samir explained that all of these factors caused rapid impacts on the Israeli economic system, which led to the downgrading of its rating with international financial institutions, and the continuation of the decline in the Israeli economy due to the worsening problems.
Uncertainty
To reduce the financial gap, the government cannot rely on a healthy flow of tax revenues from companies, many of which are collapsing, while others are reluctant to invest while it is still unclear how long the war will last, according to the aforementioned report.
Coface BDI, a major business analytics firm in Israel, estimates that 60,000 Israeli companies will close their doors this year, compared to an annual average of about 40,000 companies. Most of these companies are small, with no more than five employees.
“Uncertainty is bad for the economy, bad for investment,” said Avi Hasson, CEO of Startup Nation Central, a non-profit organization that works to promote the Israeli tech industry globally.
In a recent report, Hasson warned that the remarkable resilience enjoyed by Israel’s technology sector so far “will not be sustainable” in the face of the uncertainty caused by the protracted conflict and the government’s “destructive” economic policy.
Other sectors
Other sectors of the Israeli economy, although less important than the technology sector, have been more severely affected. The agriculture and construction sectors have struggled to fill the gaps left by Palestinians whose work permits have been suspended since October last year, driving up prices of fresh vegetables and causing a sharp decline in housing construction.
Tourism has also been hit, with the number of tourists falling sharply this year. The Israeli Ministry of Tourism estimated that the decline in the number of foreign tourists led to a loss of 18.7 billion shekels ($4.9 billion) in revenue since the beginning of the war.
Occupancy levels have fallen from more than 80 percent before the war to less than 50 percent currently, according to the hotel’s general manager, Yaron Lieberman.
Unprecedented situations
In exclusive statements to the “Eqtisad Sky News Arabia” website, the researcher in Israeli affairs, Dr. Ahmed Fouad Anwar, said that the Israeli economy is facing unprecedented conditions one year after the war in the Gaza Strip.
Anwar pointed out that Israel was subjected to severe economic pressure, which led to a decline in the value of its currency (the shekel), and financial institutions lowered their credit rating, which reflects a negative outlook for the Israeli economy.
He explained that the most prominent negative aspects of the economy include complete paralysis in major sectors such as tourism and agriculture, and investments were greatly affected as a result of the call-up of many workers to the reserve forces. Also, the continuation of the war, which no one in Israel expected, led to an increase in government and military spending, putting pressure on the national economy.
He pointed out that the displacement of displaced people from northern and southern Israel required providing monthly fees to the displaced and providing logistics and transportation, which constitutes an additional burden on the budget. He pointed out that the current policy is weakening the Israeli economy, as defense costs are increasing, especially those associated with defensive missiles used to confront attacks from Gaza or southern Lebanon, as well as from Iraq, Syria, Yemen and Iran, with defense costs rising compared to offensive missiles.
Anwar concluded by emphasizing that these unprecedented circumstances represent major challenges to the Israeli economy, putting it in a critical situation and making it difficult to maintain economic stability in the near future.
Huge losses
In turn, the international relations expert at Al-Ahram Center for Political and Strategic Studies, Dr. Ahmed Sayed Ahmed, confirmed in an exclusive statement to the “Eqtisad Sky News Arabia” website that the Israeli war on the Gaza Strip since the “Al-Aqsa Flood” operation has left Israel with heavy losses. Human losses increased, as hundreds of soldiers fell and thousands were injured, in addition to the psychological deterioration resulting from the escalation of cases of fear and the Israelis resorting to shelters, in addition to the displacement of a large number of residents of the border areas, whether in the Gaza Strip or northern Israel, as a result of Hezbollah attacks, which continued. For more than a year.
He added that these developments caused negative economic repercussions, the first of which was directing a large portion of the Israeli budget towards the war effort, including the manufacture and purchase of weapons, which reduced the resources allocated for development purposes. Israel also witnessed a decline in foreign investments, especially European and American investments, due to the lack of stability and the continuation of the war, which created a climate of uncertainty that prevented attracting investors. Third, Israel’s credit rating has been negatively affected, reflecting declining confidence in its economy.
Ahmed also pointed out that the war led to huge losses for Israeli companies due to a shortage of workers, after Israel prevented thousands of Palestinians from working inside it as part of the sanctions on Gaza. Despite its attempts to compensate for this shortage by importing workers from India and Asia, these efforts did not achieve the desired results, which harmed the economy. There is also a significant impact due to the cessation of foreign tourism, which was an important source of revenue.
Ahmed added that calling reserve forces for military work affected local companies, as many workers left their civilian jobs to join the army, which harmed productivity and led to additional losses. He also pointed to the losses resulting from the Houthis and Iran’s allies targeting Israeli ports, such as the port of Eilat, which led to the disruption of navigation and trade, both in the Mediterranean Sea and on the roads leading to… IsraelThis has added additional pressure to the Israeli economy in light of this ongoing crisis.
