Eleven months of war have taken a toll on Israel’s economy

The Israeli economy has quite quickly come to the fore after previous “shocks”, such as short-lived wars with Hamas and Hezbollah.

But the war that broke out on 7 October last year, and which has therefore almost lasted eleven months, has put a heavy strain on the economy.

There are many factors at play, including the cost of reconstruction, compensation to the families of the victims and hugely high military expenditure.

Affecting thousands

The ongoing fighting and the threat that the conflict could spread to the entire region, with Iran, Hezbollah and the Hutu militia as actors, has a major impact on tourism. Although not the biggest driver of the Israeli economy, the loss of tourists has affected thousands of jobs and small businesses.

– The most difficult thing is that we don’t know when the war will end, says tourist guide Danieln Jacob. His family now lives on savings.

– If the war lasts another six months, I don’t know how we will cope, adds Jacob. He was shocked when he returned from six months of military service this spring to find that his tourism business had completely dried up.

He was forced to close the company he had spent two decades developing.

Worse than during the pandemic

Antiques dealer Meir Sabag in Haifa says that his business is worse off now than during the COVID-19 pandemic.

On an ordinary weekday recently, the residents of Haifa could also register that the usually busy port in the city was standing still. After Yemen’s Houthi rebels have repeatedly attacked ships passing through the Suez Canal, many of the long-distance ships have stopped using Israeli ports. This is according to a port employee who does not want to be named because he is sharing internal information.

He stated that Israeli ports have seen a 16 percent decrease in shipping in the first half of the year, compared to the same period in 2023.

Major airlines such as Delta, United and Lufthansa have stopped their flights to and from Israel.

The Israeli information company CofaceBDI reports that around 46,000 businesses have closed since the war began – 75 percent of them small businesses.

Even the iconic American Colony Hotel in occupied Palestinian East Jerusalem, a popular stopover for politicians, diplomats and celebrities, has laid off workers and is considering wage cuts, says Jeremy Berkovitz, who represents the owners.

Prime Minister Benjamin Netanyahu has tried to reassure those affected by saying that the economic damage is only temporary.

Weakened international trust

But the bloodiest, most destructive war ever seen between Israel and Hamas has not only damaged thousands of small businesses, but also undermined international confidence in an economy once admired as powerful and innovative.

Several leading economists believe that a ceasefire is the best way to stop further damage.

Karnit Flug, Israel’s former central bank governor, now vice president for research at the Israel Democracy Institute, emphasizes that the economy is currently suffering from enormous uncertainty.

– It is related to the security situation, the question of how long the war will last, what the intensity of the war will be and the question of whether there will be a further escalation, says Flug.

A huge trauma

As is well known, the war broke out on October 7, when Hamas militants moved into Israel, killing around 1,200 people and taking 250 people hostage. It created enormous trauma in Israel, and demands that Hamas be crushed once and for all.

All efforts to broker ceasefires have failed, and Iran and Hezbollah have threatened to avenge the recent killings of militant leaders by Israel. It has increased the dangers of a major regional war.

Yacov Sheinin, an Israeli economist with years of experience advising Israeli prime ministers and ministries, estimates that the total cost of the war amounts to $120 billion, or 20% of the country’s gross domestic product.

Of all 38 member countries of the Organization for Economic Co-operation and Development (OECD), Israel’s economy experienced the largest decline from April to June, the organization recently reported.

Reduced growth

Israeli GDP was expected to grow 3 percent in 2024. Now the Bank of Israel predicts a growth rate of 1.5 percent – and that’s if the war ends this year.

Credit rating agency Fitch downgraded Israel’s rating from A-plus to A earlier this month. S&P and Moody’s had also made a similar rating then.

The downgrade may have the consequence that the government’s borrowing costs increase.

– In our view, the war on Gaza could last well into 2025, Fitch warned in his note, which also highlighted the possibility of “significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.”

In another worrying sign, the finance ministry said earlier this month that the country’s deficit over the past 12 months has risen to over 8% of GDP, 1.4 per cent more than the ministry had forecast for 2024.

In 2023, Israel’s budget deficit was about 4 percent of GDP.

Will keep the coalition together

The growing problems for the economy put pressure on the Israeli government to end the war.

For Netanyahu, however, it seems very important to keep the coalition together. There are strong forces within the government that will – at any cost – continue the war until Hamas is completely annihilated.

Former central bank governor Flug points out that this situation is unsustainable. He believes that the coalition will have to cut back on expenses, such as unpopular subsidies to ultra-orthodox schools which are perceived by the general public as wasteful. The ultra-conservative forces in the government will of course keep these subsidies.

– But the public will have a hard time accepting it if the government shows no willingness to give up some of the things that are dear to them, Flug points out.

Gaza is worse off

If the economic situation in Israel has become difficult, the war has inflicted a crushing blow on Gaza’s economy. Even before the war, Gaza had a ruined economy. Now – after eleven months of war – 90 percent of the population has been displaced, and the vast majority of the workforce has become unemployed. The fighting has killed more than 40,000 people, according to Palestinian health officials in the Hamas-ruled area.

All banks in the area have closed, and economic activity is almost at a standstill.