2024-10-05 13:55:05
Update
October 5, 2024
15:55
The war against Hamas has impacted the Israeli economy without weakening it. The extension of the conflict on several fronts could worsen the burden of the war and plunge the country into recession.
The Israeli economy may be very resilient, but it has been under severe strain since the start of Israel’s longest war since its creation in 1948. The continuation of hostilities, recently marked by an intensification of fighting with Hezbollah and Iran, could plunge Israel into recession.
A costly defense
Since October 7, 2023, the war has cost more than 67 billion dollars to the Israeli budgetto which must be added 10 billion to house the 100,000 displaced people from the north of the country having fled Hezbollah fire and 6 billion to repair the damage.
With the extension of the conflict on several fronts, this cost continues to increase. The price of Israel’s air defense against Iranian ballistic attacks gives the measure of this increase.
The Islamic Revolutionary Guard Corps fired on Tuesday nearly 200 ballistic missiles against Israel. No less than 90% of projectiles were intercepted by the Israeli air defense system on several levels, Iron Dome, David’s Sling and Arrow 2 and 3. The rest were destroyed by the US military.
A missile fired by Iran costs it a million dollars each. However, the price of an Israeli interceptor varies between 2 and 3 million dollars. In total, in one night, the attack on Tehran cost around 200 million dollars and the defense of Israel 500 million.
Slow growth
In addition to weighing on the state budget, the war strongly affects the growth of the Israeli economy. The shock was severe. During the last three months of 2023, GDP fell by 21% at an annual rate.
During this period, traffic at the port of Ashodthe heart of Israeli maritime trade, has collapsed by half. Moreover, more than 300,000 people were mobilized between October and December 2023which affected the vitality of the economy.
“The conflict in Gaza could last until 2025.”
During the first three months of 2024, activity resumed. Israel’s growth rebounded 14.4%before showing a more modest level (0.7%) in the following quarter.
Impact durable
Several growth sectors of the Israeli economy maintain certain dynamism. This is the case of advanced technologiesfor which Israel is a world reference, and the arms industry.
On the other hand, tourism, agriculture and construction are at half mast. Israel welcomed 500,000 tourists during the first half of the year, which is three times fewer than usual. In Tel Aviv, major infrastructure projects are at a standstill.
The impact of the war on GDP is expected to be lasting. The Central Bank of Israel revised downwards, last July, its growth forecasts for 2005 at 1.5%, compared to 2% previously.
Deterioration of grades
Rating agencies S&P, Moody’s and Fitch have lowered their rating of the country’s debt. “The conflict in Gaza could last until 2025”observed Fitch in August, worrying “risks of it spreading to other fronts“. Since then, Israel has launched an offensive in Lebanon and Iran has launched a massive air attack.
Even though Israel remains considered a solid borrower, the deterioration of its rating increases the cost of debtbut the government needs money to continue its war. The lowering of the rating also arouses investor distrust, which impacts company financing.
A budget plan criticized
“Nothing is planned in the event of a conflict lasting into 2025, a situation which would plunge the country into economic and financial chaos.”
To keep the budget afloat, the Israeli government adopted, in early September, a budgetary plan to reduce the deficit to 4% against 8% currently. This plan, supported by Finance Minister Bezalel Smotrich (far right) plans tosave 35 billion shekels (8.3 billion euros) through a drastic reduction in spending and an increase in taxes.
The measures are highly criticized by economists. This plan, and the government statements surrounding it, show “that the government is not aware of the extent of the economic problem it faces or that he prefers to turn a deaf ear, even though the risk is very high for the economy and national security” write in a note Yoel Naveh, chief economist of the Ministry of Finance from 2014 to 2018, and Lev Drucker, his former deputy.
“The Smotrich plan is based on a problematic hypothesis which remains to be verified: the war on all fronts will end by the end of 2024. However, nothing is planned in the case of a conflict which would extend into 2025a situation which would plunge the country into economic and financial chaos”, summarizes Jacques Bendelac, doctor in economics and Israeli essayist.
The summary
- The Israeli economy, one of the most resilient, is put under severe strain since the start of the war triggered by the massacre committed by Hamas on October 7, 2023.
- In one year, the war cost more than 67 billion dollars to the Israeli budget. All three rating agencies have downgraded Israel’s debt rating.
- The more the war prolongs and becomes regionalized, the more the cost increases. Air defense during Iran’s October 1 ballistic attack cost approximately 500 million dollars to Israel.
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