How Gaza war sent Israel's $500 bn economy into the unknown

Reduced labour force. Rocket sirens that never stop. Enduring shock from an unplanned attack. The economic impact of Israel’s conflict with Hamas militants will be unprecedented in recent memory.

Days after the city shut down building sites, the cranes that dot Tel Aviv’s expanding skyline remained still. They reopened this week with tougher safety regulations in place, but an industry report claimed that just one sector’s idleness costs the economy an estimated 150 million shekels ($37 million) every day.

“This is not a hit for contractors or industrialists alone,” said Raul Sarugo, president of the Israel Builders’ Association. “This is a hit for every household in Israel.”

In the bloodiest attack on civilians in its history, Hamas terrorists from Gaza ambushed border communities on October 7 and caught Israel off guard. Its military has launched a brutal bombardment on Gaza in the two weeks since.

With the most developed economy in the Middle East and strengths in technology and tourism, Israel had a thriving economy throughout the majority of 2023. 3% growth was anticipated this year because to the low unemployment rate.

But as the war threatens to escalate into a regional crisis and a possible ground invasion of Gaza, Israelis are bunkering down and cutting back on everything but food. Ratings firms have already issued a warning that they may lower their rating of the nation’s creditworthiness.

While shops are furloughing workers, hundreds of thousands of army reservists have been called up, leaving a huge personnel deficit and affecting supply chains from seaports to supermarkets. The shekel is now sagging.

Additionally, the battle has stopped hundreds of Palestinian labourers from travelling from Gaza to Israel and reduced the flow from the occupied West Bank.

For the first two weeks of the war, the biggest mall in Jerusalem was deserted, but slowly, shoppers are starting to return.

“There has been a drastic decline in traffic,” said Netanel Shraga, manager of the Columbia sportswear shop.

Some of Shraga’s staff have been called up to army service, he said. Others are too afraid to come to work.

Israeli evacuees from border regions are half-filling hotels; the remaining rooms are largely vacant. Even in the vicinity of Gaza, factories are still in operation, but there are frequently insufficient truck drivers to make regular deliveries.

With the exception of a surge in grocery store buying, credit card purchases were down 12% over the previous week compared to the same time last year.

The high-tech sector, which grew during the COVID pandemic, is now having difficulty. Typically, it accounts for 50% of all exports and 18% of Israel’s GDP.

“Productivity goes down significantly, because it’s hard to focus on day-to-day work when you have existential concerns,” said Barak Klein, chief financial officer at fintech firm ThetaRay.

Of its 80 employees working in Israel, 12 were recruited into the reserves. Some people have kids that are home from school. And the continual worry about rocket fire remains.

ThetaRay established a creche facility for staff members who needed to bring children to work and has been depending on their international offices to help with some of the workload.

The Economy Ministry established a war room and issued a request for assistance. So far, the database has connected at least 8,550 individuals with failing firms. A big grocery chain’s logistics centre was overloaded, so 38 personnel were dispatched to work an overnight shift.

The government has pledged to spend “no limit” on financing the war and compensating impacted individuals and businesses, which will result in a larger budget deficit and more debt.

The economic future may not be well predicted by the conflicts of the past. In 2006, a 34-day conflict with the Iranian-backed Hezbollah saw a 0.5% dip in the GDP as a result of decreased exports and sluggish manufacturing, but the economy swiftly recovered.

What’s happening today is different, officials say.

There is an “emotional crisis” among the Israeli public and it is already taking a toll, said Leo Leiderman, chief economic adviser to Bank Hapoalim, one of the country’s biggest banks.

“People will minimize their consumption spending, because of the uncertainty and the mood,” he said.

With consumer spending accounting for more than half of economic activity, the damage to the economy may be significant.

On Monday, the Bank of Israel reduced its projections for economic growth in 2023 and 2024, assuming the conflict will be limited to Gaza, from 3.0% to 2.3% and 3.0%, respectively. Governor Amir Yaron, who currently opposes rate reduction, anticipates a recovery.

“We have known how to recover from difficult periods in the past and to return rapidly to prosperity,” Yaron said. “I have no doubt that it will do so this time as well.”

(With agency inputs)