Israeli Economy Struggles Amidst Conflict with Hamas

The Israeli economy is currently grappling with one of its most significant challenges this century, as the ongoing conflict with Hamas inflicts a heavy toll across various sectors. From small restaurants to high-tech giants and even a major gas field operated by Chevron Corp., businesses in Israel are feeling the economic repercussions, according to a comprehensive analysis by Bloomberg.

Comparisons are being drawn between the economic impact of the conflict and the lockdowns witnessed during the Covid-19 pandemic. Schools, offices, and construction sites are either empty or open for only a few hours a day, reminiscent of the pandemic's early days. The Israeli government's decision to mobilize 350,000 reservists ahead of the ground assault on Gaza, constituting approximately 8% of the workforce, is unprecedented and has led to a sudden economic downturn. This drastic move, coupled with a partial economic freeze, has caused significant disruptions across various sectors, ranging from banking to agriculture. The estimated cost to the government stands at a staggering $2.5 billion per month, according to Mizrahi-Tefahot, a leading Israeli bank. The central bank has warned that the longer the conflict persists, the more severe the economic impact will become.

The economic repercussions are already substantial. Israeli stocks have taken a beating, with the nation's stocks being the worst performers globally since the conflict began. The primary index in Tel Aviv has witnessed a 16% fall in dollar terms, erasing nearly $25 billion from its value. The Israeli shekel, despite the central bank's announcement of an unprecedented $45 billion support package, has plummeted to its weakest level since 2012 and is on course for its worst annual performance this century. The cost of hedging against further shekel depreciation has soared.

Business owners like Naama Zedakihu, who owns two restaurants, are at a crossroads, considering temporary layoffs as the ongoing crisis has left their establishments empty even during operating hours. Zedakihu lamented, "Deliveries are not enough to sustain the business."

The extent of the long-term economic impact will hinge on the geographic scope and duration of the conflict. Prime Minister Benjamin Netanyahu has cautioned that the military campaign is anticipated to be "long and difficult" as Israel embarked on its invasion of Gaza.

JPMorgan Chase & Co. has made a sobering prediction, foreseeing a significant 11% contraction in the Israeli economy this quarter on an annual basis. This is a stark contrast to previous conflicts, such as the one with Hezbollah in 2006 and the 2014 conflict with Hamas, which had a minimal impact on economic activity. JPMorgan analysts argue that the current war has had a far greater impact on Israel's internal security and credibility.

The initial disruption was so severe that only 12% of Israeli manufacturers were in full production two weeks into the conflict, with most manufacturers citing staff shortages as their primary problem.

The ongoing war is testing Israel's resilience. The government anticipates that budget deficits could more than double this year and the next, compared to previous projections. Notably, S&P Global Ratings, Moody's Investors Service, and Fitch Ratings have issued warnings on the country's debt outlook, inching it closer to a potential first downgrade.

Israel has imposed work restrictions, closed schools, and limited indoor gatherings to 50 people in a significant portion of the country. Simultaneously, skirmishes with Hezbollah, an Iranian-backed militant group, on Israel's northern border have led to the evacuation of numerous villages and towns. Collectively, more than 120,000 Israelis have been forced to leave their homes, contributing to a collapse in household spending, which has sent shockwaves through the consumer sector, responsible for roughly half of Israel's GDP.

The economic challenges extend to various sectors, from construction to real estate and technology companies. The construction sector, which heavily relies on 80,000 Palestinians residing in the West Bank, has suffered from security restrictions and rising interest rates, and many companies may struggle to meet their obligations, posing potential risks to banks that have significant commercial loans in this sector. A halt to construction and real estate investment, contributing 6% of Israel's tax revenue, could limit government income and potentially trigger a new surge in housing prices, exacerbating the already high cost of living in Israel.

Additionally, the tech sector is grappling with employee departures as the nation shifts its focus to the war effort.

While the Israeli economy entered this conflict with a strong foundation, thanks to technology exports and offshore gas fields, it is currently facing an unprecedented test of its durability. The economic cost of the ongoing conflict is estimated to be at least 27 billion shekels, equivalent to 1.5 percent of Israel's GDP, according to Bank Hapoalim.

As the Israeli government and businesses work to address these economic challenges, the duration and scope of the conflict will significantly impact the long-term economic recovery and stability of the nation.

By fLEXI tEAM