Gaza exhaust Israel economy

In the first part, we examined the ethical and political costs on Israel, highlighting how the war has been a significant shock across various domains. Furthermore, we noticed Israel’s central bank governor’s anticipation of war costs and economic losses exceeding $58 billion so far, putting immense pressure on the state’s economy and its future growth rates. Now, let’s complete the comprehensive view by exploring the broader economic effects of the war.

One of the most economically active sectors in Israel is the innovation and technology sector, serving as a primary driver of the Israeli economy in the last three decades. However, due to the war, this sector is expected to endure prolonged challenges. Investments in research and development companies have ceased, leading to the closure of numerous technology institutions, relocating to other countries for security reasons. This, in turn, affects the financial performance of this crucial industry, accounting for tens of billions of dollars annually, and results in the loss of tens of thousands of prestigious job opportunities. The technology and innovation sector plays a fundamental role in Israel’s economic growth, contributing more than $85 billion of Israeli exports which achieved $ 165 billion in 2022 (51 per cent). In fact, the absence of income from advanced technology, electronic chips and software considers a major loss to the country’s public income. Moreover, the departure of Israeli technological talent will lead to a negative impact, including job losses, income reduction, and other adverse effects on the community in the coming years.

Regarding investment activities and financial markets, the war has remarkably affected them which increased economic uncertainty in financial markets. The raised financial risk environment has led to a decline in both local and foreign investments, with funds flowing out of the country. This has caused significant fluctuations in the stock market, resulting in a loss exceeding $62 billion for the Tel Aviv Stock Exchange in the first few weeks. Banks also experienced substantial losses, with a 31 per cent decrease in their share value. Israeli investments in American financial portfolios suffered a loss of more than 12 per cent, while Israeli-linked international stocks of $43 billion faced significant losses of 14 per cent in global markets. Bondholders are now demanding redemption of their bonds, selling them at a loss, according to Bloomberg data. Furthermore over 100 Israeli companies listed in American stock exchange had lost more than 15 per cent of its value as per Israel statistics bureau.

The labour force and human capital have also been significantly touched, with a considerable number seeking more stable and secure environments outside Israel. This migration has resulted in a negative impact on the job market, losing more than 32 per cent of skilled and qualified workers and resulted in 760.000 employees declared unable to work. The suspension of around 230.000 Palestinians labour in Israel, has stopped factories, construction projects, and developmental initiatives. Additionally, the call-up of reserve soldiers for general mobilisation poses a painful choice for the Israeli economy because a wide range of skilled professionals, including experts and factory workers, have been withdrawn from the market to join military operations. This has disrupted economic activities, reduced labour supply, and contributed to a recessionary inflationary environment, characterised by increased inflation rates and decreased economic growth. 

The Israeli economy has experienced departure of 63 per cent of foreign investments, and 80 per cent drop in international trade, affecting the flow of commerce and supply chains. The functionality of ports and transportation routes has been compromised, causing delays in the import and export of goods and retail trade. Further, the operations in the Red Sea and Bab Al Mandeb has also left its negative impact on Israel economy for several years.

The cost of the war on the Israeli economy, ranking 26th globally with an economy exceeding $530 billion, is surprising. It reaches $750 million weekly, equivalent to $3 billion monthly. Israel incurred over $9.2 billion extra, or 1.75 per cent of the GDP, in December to cover emergency war expenses. Additionally, tax revenues in 2024 are anticipated to decline due to economic slowdown and reduced financial returns. A deficit is expected in the budget for $21.5 billion for 2023 (4 per cent of GDP), rising to $29 billion in 2024 (5.5 per cent). This will deteriorate Israel’s external debt, reaching $355 billion (67 per cent of GDP) to $390 billion (74 per cent of GDP) in 2024.

Credit rating agencies worldwide have painted a gloomy picture of Israel’s future economy. Moody’s, initially forecasting a 3 per cent growth for Israel in 2023 and the next year, has now changed its outlook to negative due to increased financial deficit, decreased GDP, economic shrinkage, reduced production, declining trade and more. Similarly, Standard & Poor’s has downgraded Israel’s creditworthiness outlook to negative due to concerns about government debt growth and the government’s inability to control spending because of the war. It also expected 8 per cent contraction in the Israeli economy in the last quarter of 2023. Fitch, too, has assigned a negative credit rating outlook to Israel, considering the economy under negative surveillance due to the growing risk of the conflict spreading to other regional entities. The agency anticipates the Israeli economy remaining in distress for an extended period, possibly extending to years.

What happened on October 7 has had a profound impact on the Israeli economy, potentially leading the state to consider ceasing the war for purely economic reasons. This insight comes from exciting report by the Central Bank of Israel, which warns that an additional three months of war would result in the bankruptcy of the bank, depletion of foreign reserves, and a collapse of the economy.  The events of October 7 have deeply disturbed Israel, challenging the notion of an unbeatable army and exposing the fragility of its society, human values, economic simplicity, and weaknesses in front of the world. Politically, I hope that these events serve as a genuine substance for repositioning the Palestinian conflict, bringing it to the negotiation table in search of a political solution rather than a military one.

Haider Al Majali is an economic and investment expert. hmajali@aldar-bahrain.com