Due to the War: Israel Faces Economic Losses Across Various Sectors

Since the outbreak of the genocidal war on Gaza nearly a year ago, Israel has been experiencing significant economic repercussions, most notably an economic slowdown and a decline in the activity of several vital sectors, resulting in a marked increase in poverty levels. The ongoing war has negatively impacted the Israeli economy, which was already grappling with challenges before launching its military offensive on the Gaza Strip, according to a report by France 24.

Prior to October 7, Israel was facing an internal crisis due to mass protests sparked by the controversial judicial reforms proposed by the far-right government of Benjamin Netanyahu. This internal crisis had already cast a shadow over the Israeli economy, leading to diminished investor confidence and increased social tensions.

Israel’s Economy Suffers from Contraction and Credit Downgrades

With the onset of the war, the economic crisis has dramatically worsened, as the country has faced a severe blow from military depletion and massive spending on military operations that have killed thousands of Palestinians, leading to a contraction in economic activities.

Experts predict that the negative impact of this war on the Israeli economy will persist, especially in the absence of any political or military horizon that could end the conflict, increasing pressure on the occupying government to find comprehensive solutions that address the escalating economic and social ramifications.

The Israeli economy contracted by 0.4% in the second quarter of 2024 when measured by per capita GDP. While analysts at the Tel Aviv Stock Exchange had anticipated a 5.9% growth for the Israeli economy during the same period—figures in line with Bloomberg’s forecast—the actual numbers fell short of expectations, recording only 1.2%.

Major international credit rating agencies have downgraded their ratings on Israeli debt, prompting Netanyahu and Israeli officials to criticize these agencies. Netanyahu emphasized that the economy is “stable and robust” and will improve once the war concludes.

Economic expert Jack Bendilak told France 24 that “the Israeli economy is resilient, but it is struggling to bear the burden of this prolonged war,” warning of a potential recession should the conflict continue for an extended period.

Fitch Ratings predicted in August that the war in Gaza, the longest conflict since the establishment of the occupation in 1948, could extend into 2025. Moreover, major financial institutions expressed doubts about Israel’s ability to manage its financial challenges and achieve sustainable economic growth.

Both Citibank and JPMorgan released reports warning about recent macroeconomic data and potential future risks, as reported by the Israeli economic newspaper Globes. In an analysis published by Citibank, the bank highlighted concerns raised by international rating agencies that recently downgraded Israel’s credit rating.

The bank noted that Israel’s credit rating remains precarious, with no clear solution to the ongoing regional tensions. It pointed out that the spread between Israeli government bonds in dollars and their U.S. counterparts has reached around 200 basis points, according to the newspaper.

The bank outlined a significant likelihood of further downgrades, particularly from Moody’s, due to uncertainties surrounding the Israeli government’s ability to control its fiscal deficit. Citibank projected that the budget deficit as a percentage of GDP could reach 7.6%, well above the target set by the Israeli Ministry of Finance, which stands at 6.6%.

This forecast—according to the newspaper—reflects the bank’s skepticism about the Israeli government’s commitment to raising taxes or reducing spending. The bank indicated that the occupation may struggle to rectify its budget following economic shocks, jeopardizing its financial stability.

JPMorgan also issued a bleak report on the Israeli economy, cutting its growth forecast for Israel’s GDP in 2024 from 1.6% to 1.4%. The figures reflect a failure of various sectors of the Israeli economy to adapt to the ramifications of the Gaza war, particularly in construction, agriculture, services, and tourism, according to statistics released by the Israeli Central Bureau of Statistics last month, amid expectations of further bleakness for the remainder of 2024.

One of the most significant declines in the second quarter was seen in the export sector, which shrank for the third consecutive quarter, recording a decrease of 7.1%.

Multiple Sectors Affected

According to a Bloomberg report, the Israeli economy is facing noticeable stagnation, largely due to the recession in the construction sector, which heavily relies on Palestinian labor coming from the West Bank. Before the war, the occupation authorities issued nearly 100,000 work permits for Palestinians, which significantly supported the construction, agriculture, and industrial sectors.

Additionally, there were tens of thousands of Palestinian workers operating informally in the occupied territories. With the outbreak of the war, these workers were barred from entering Israel, severely affecting these sectors.

Despite government promises to replace Palestinian workers with foreign laborers from countries such as India, Bangladesh, and the Philippines, these plans have failed to fill the gap, leading to a severe crisis in construction and agriculture sectors.

Moreover, the tourism sector has been significantly impacted since the war began, as the number of tourists has drastically declined, both for leisure and religious tourism. According to data from the Ministry of Tourism, around 500,000 tourists visited Israel between January and July, a quarter of the number during the same period last year, reflecting a sharp decline in this vital sector of the occupation’s economy.

Emerging Tech Investors Abandon the Israeli Economy

A study published by the Israeli financial site Calcalist indicated that the high-tech sector and startups in Israel are suffering serious repercussions since the onset of the war in Gaza. A staggering 49% of high-tech and startup companies have canceled their investments, while more than 80% of businesses and 74% of investors have expressed doubts about the government’s ability to assist this vital sector in recovering.

The study confirmed that the situation is even more dire in northern Israel, where 69% of high-tech companies in that region voiced significant concerns about their ability to attract investments in the coming year. Consequently, 40% of these companies are considering relocating their operations partially or entirely to other regions in search of a more stable and investment-friendly environment.

These findings indicate that the war is not only affecting traditional sectors such as construction and agriculture but is also causing a slowdown in one of the most advanced economic sectors in Israel.

Increased Government Spending and Poverty

As the war and its repercussions continue, the Israeli economy has witnessed a substantial increase in government spending, with public consumption rising by 8.2% in the last quarter compared to 2.6% in the previous quarter. This increase in government expenditure, primarily to meet wartime needs, raises concerns among experts regarding the over-reliance of economic growth on this rising public spending.

Simultaneously, the Israeli budget’s fiscal deficit continues to rise, reaching 8.1% of GDP by July, equivalent to 155.2 billion shekels (approximately 47.1 billion dollars), according to the latest report from the Accountant General of the Ministry of Finance, Yali Rotenberg. This growing deficit indicates the financial pressures faced by the Israeli government due to massive military expenditures and economic stagnation.

The fiscal deficit in Israel for the months ending in June reached approximately 7.6% of GDP, while previous forecasts from the Ministry of Finance indicated that the deficit would amount to 6.6%, roughly equating to around 34 billion dollars. These figures reflect a continuing widening of the deficit, complicating the occupation’s ability to bear the debt costs incurred to cover this deficit, especially with rising interest rates on both the dollar and the shekel.

Furthermore, Israeli public debt has surpassed 67% of GDP, compared to about 63% before the war on Gaza began in October. Additionally, experts note that credit consumption in Israel has significantly increased over the past two decades, with many families relying on loans to meet their needs. However, during economic crises, many of these families struggle to repay their debts, exacerbating economic conditions for numerous households.

Economists warn that rising living costs and slowing economic growth will undoubtedly lead to an increase in the poverty rate in the country. Indeed, assistance organizations in Israel have reported a surge in demand for their services, with an increasing number of new individuals seeking food assistance during distribution operations.

According to a report from France 24, the “Pitchon Lev” organization distributes baskets of fruits, vegetables, and meats for free twice a week to support families in Israel. The organization’s founder, Eli Cohen, noted that its activities have doubled since the beginning of the war, with a rising number of families in need. Currently, “Pitchon Lev” provides support to over 200,000 families.

The Economic Cost of War

Israeli economic expert Rakevet Rosk Aminah, former CEO of Leumi Bank, estimated that the war on Gaza has already cost the occupation’s economy more than 67.3 billion dollars (250 billion shekels). In a previous interview last month with Channel 12, Rosk pointed out that the economic damages from the war exceed direct costs, with increasing requests from the defense establishment to boost its annual budget by at least 20 billion shekels (5.4 billion dollars). She also indicated that there are many hidden costs that have not been accounted for, such as expenses related to evacuating civilians, treating the wounded, and meeting urgent economic needs.

For his part, Professor Jacob Frenkel, winner of the Israel Prize for economics and former governor of the Bank of Israel, emphasized that addressing the growing deficit is the most urgent task. He pointed out that financial conditions were stable at the beginning of 2023, with no deficit, but the war radically changed this trajectory. By the end of July, the fiscal deficit reached 8.1% of GDP, equivalent to about 155 billion shekels (42 billion dollars), placing significant pressure on the government to cover this escalating deficit.

Channel 12 reported that Israel will require at least 40 billion shekels (10.8 billion dollars) to manage the war expenses in the coming months, which are expected to push the fiscal deficit up to 10% by the end of the year if the war continues.

In light of the current economic situation, the Israeli government has begun considering tax hikes in order to restore some financial balance. However, experts have indicated that such increases may negatively impact the economy, leading to further declines in consumer confidence and spending, thereby exacerbating the crisis.

Conclusion

As Israel continues its military aggression against Gaza, the repercussions are deeply felt across various sectors of its economy, raising concerns about potential long-term impacts on its financial stability and growth. The ongoing war has not only aggravated existing economic issues but has also introduced new challenges that the Israeli government will need to address urgently to restore stability and confidence in its economy.