Apartment blocks and office buildings under construction in Tel Aviv in August 2024<\/p>\n
In late September, as Israel\u2019s nearly year-long war widened and its credit rating was downgraded yet again, the country\u2019s finance minister, Bezalel Smotrich, said that, while Israel\u2019s economy was under strain, it was resilient.<\/p>\n
\u201cIsrael\u2019s economy bears the burden of the longest and most expensive war in the country\u2019s history,\u201d Smotrich said on September 28, a day after Israeli airstrikes killed Hezbollah\u2019s leader Hassan Nasrallah in Lebanon\u2019s capital Beirut, ratcheting fears that tensions with the militant group would turn into a full-blown conflict. \u201cThe Israeli economy is a strong economy that even today attracts investments.\u201d<\/p>\n
Almost a year after Hamas\u2019 deadly attack on October 7, Israel is pushing forward on multiple fronts: launching a ground incursion against Hezbollah in Lebanon, carrying out airstrikes in Gaza and Beirut<\/a>, and threatening retaliation for Iran\u2019s ballistic missile attack earlier this week. As the conflict spills over into the wider region<\/a>, the economic costs will spiral too, both for Israel and other countries in the Middle East.<\/p>\n \u201cIf recent escalations turn into a longer and more intense war, this will take a heavier toll on economic activity and growth (in Israel),\u201d Karnit Flug, a former governor of Israel\u2019s central bank, told CNN on October 1.<\/p>\n The war has significantly worsened the situation in Gaza, pushing it into an economic and humanitarian crisis long ago, and the West Bank is \u201cundergoing a rapid and alarming economic decline,\u201d the United Nations said in a report last month.<\/p>\n The Lebanese economy, meanwhile, could contract by up to 5% this year due to cross-border attacks between Hezbollah and Israel, according to BMI, a market research firm owned by Fitch Solutions.<\/p>\n Israel\u2019s economy could shrink even more than that, based on a worst-case estimate by the Institute for National Security Studies at Tel Aviv University.<\/p>\n Even in a more benign scenario, its researchers also see<\/a> Israel\u2019s gross domestic product per head \u2014 which in recent years overtook the United Kingdom\u2019s \u2014 falling this year, as Israel\u2019s population grows faster than the economy and living standards decline.<\/p>\n Before the October 7 attack and ensuing Israel-Hamas war, the International Monetary Fund forecast that Israel\u2019s economy would grow by an enviable 3.4% this year. Now, economists\u2019 projections range from 1% to 1.9%. Growth next year is also expected to be weaker than earlier forecasts.<\/p>\n Yet Israel\u2019s central bank is not in a position to cut interest rates to breathe life into the economy because inflation is accelerating, propelled by rising wages and soaring government spending to fund the war.<\/p>\n The Bank of Israel estimated in May that costs arising from the war would total 250 billion shekels ($66 billion) through the end of next year, including military outlays and civilian expenses, such as on housing for thousands of Israelis forced to flee their homes in the north and south. That is equivalent to roughly 12% of Israel\u2019s GDP.<\/p>\n Those costs look set to rise further as fiercer fighting with Iran and its proxies, including Hezbollah in Lebanon, adds to the government\u2019s defense bill and delays the return of Israelis to their homes in the country\u2019s north. Israel launched a ground incursion into southern Lebanon targeting Hezbollah on September 30.<\/p>\n Smotrich, the finance minister, is confident that Israel\u2019s economy will bounce back once the war ends, but economists are concerned the damage will far outlast the conflict.<\/p>\n Flug, the former Bank of Israel governor and now vice-president of research at the Israel Democracy Institute, says there is a risk the Israeli government cuts investment to free up resources for defense. \u201cThat will reduce the potential growth (of the economy) going forward,\u201d she said.<\/p>\n Researchers at the Institute for National Security Studies are similarly downbeat.<\/p>\n Even a withdrawal from Gaza and calm on the border with Lebanon would leave Israel\u2019s economy in a weaker position than before the war, they said in a report<\/a> in August. \u201cIsrael is expected to suffer long-term economic damage regardless of the outcome,\u201d they wrote.<\/p>\n \u201cThe anticipated decline in growth rates in all scenarios compared to pre-war economic forecasts and the increase in defense expenditures could exacerbate the risk of a recession reminiscent of the lost decade following the Yom Kippur War.\u201d<\/p>\n The 1973 war, also known as the Arab-Israeli war, launched by Egypt and Syria against Israel\u2019s forces in the Sinai Peninsula and Golan Heights, ushered in a long period of economic stagnation in Israel, partly as the country massively ramped up defense spending.<\/p>\n Likewise, potential tax hikes and cuts to non-defense spending \u2014 some already mooted by Smotrich \u2014 to fund what many expect to become a permanently enlarged military, could hurt economic growth. Such measures, coupled with a weakened sense of security, could also spur an exodus of highly educated Israelis, notably tech entrepreneurs, Flug warned.<\/p>\n \u201cIt doesn\u2019t have to be in very large numbers, because the tech sector is very dependent on a few thousand of the most innovative, creative and entrepreneurial individuals,\u201d she said of a sector that accounts for a hefty 20% of Israel\u2019s economic output.<\/p>\n A large-scale departure of high-earning taxpayers would further dent Israel\u2019s finances, which have taken a knock from the war. The government has delayed publishing a budget for next year as it grapples with competing demands that make it hard to balance its books.<\/p>\n The conflict has caused Israel\u2019s budget deficit \u2014 the difference between government spending and revenue, mostly from taxes \u2014 to double to 8% of GDP, from 4% before the war.<\/p>\n Government borrowing has soared and become more expensive, as investors demand higher returns to buy Israeli bonds and other assets. Multiple downgrades to Israel\u2019s credit ratings made by Fitch, Moody\u2019s and S&P are likely to raise the country\u2019s cost of borrowing even further.<\/p>\n In late August \u2014 a month before Israel carried out strikes<\/a> on Lebanon\u2019s capital and the ground incursion against Hezbollah in the country\u2019s south \u2014 the Institute for National Security Studies estimated that just one month of \u201chigh-intensity warfare\u201d in Lebanon against the militant group, with \u201cintensive attacks\u201d in the opposite direction that damage Israeli infrastructure, could cause Israel\u2019s budget deficit to soar to 15% and its GDP to contract by up to 10% this year.<\/p>\n To shrink the fiscal hole, the government can\u2019t rely on a healthy flow of tax revenue from businesses, many of which are collapsing, while others are reluctant to invest while it\u2019s unclear how long the war will last.<\/p>\n Coface BDi, a major business analytics company in Israel, estimates that 60,000 Israeli firms will shut this year, up from an annual average of around 40,000. Most of these are small, with up to five employees.<\/p>\n \u201cUncertainty is just bad for the economy, bad for investment,\u201d said Avi Hasson, the CEO of Startup Nation Central, a non-profit that promotes Israel\u2019s tech industry globally.<\/p>\n In a recent report, Hasson warned that the remarkable resilience of Israel\u2019s tech sector so far \u201cwill not be sustainable\u201d in the face of the uncertainty created by the prolonged conflict and the government\u2019s \u201cdestructive\u201d economic policy.<\/p>\n\u2018Long-term\u2019 economic damage<\/strong><\/h2>\n
Uncertainty \u2018the biggest factor\u2019<\/strong><\/h2>\n