The Pessimistic Outlook for the Israeli Economy Amid Ongoing Gaza Conflict
In the wake of the two-month-long and still unresolved conflict in Gaza, the Israeli economy is facing a grim outlook. The Israeli government’s budget deficit has soared to 22.9 billion shekels (approximately six billion dollars) in October, marking a staggering increase of over seven times on an annual basis, according to official data from the Ministry of Finance.
The ministry attributes this deficit to the escalating costs of funding the war against the Palestinian movement, Hamas, in the Gaza Strip. Moreover, the deficit as a percentage of the Gross Domestic Product (GDP) has risen from 1.5 percent in September to 2.6 percent in the twelve months leading up to October.
The ministry also points out that the revenues plummeted by 15.2 percent last month due to tax deferments and a decrease in social security income, all resulting from the war that erupted on October 7.
The initial estimate of the Ministry of Finance regarding the cost of the war on the state treasury was based on the assumption that the situation wouldn’t extend beyond a year. Furthermore, it was assumed that no additional territories would be developed, and reserve soldiers would return to work soon.
Nevertheless, considering the high degree of uncertainty and a multitude of preliminary assumptions, the Treasury Department conservatively set the cost at approximately 200 billion shekels, which is roughly 10 percent of the GDP. It’s important to note that this estimate leans towards optimism.
Ahmed Al-Qarout, a resident political economist in London, explained the potential effects on the Israeli economy due to the ongoing ground operation in Gaza, which lacks a foreseeable endpoint. The most severely affected sectors include the mobilization of 360,000 reserve soldiers, which has had several far-reaching consequences:
- The attack on October 7 has posed a severe threat to the Israeli economy in the short and long term, causing an outflow of workers and a halt in immigration due to the country’s security situation.
- Market damage results from a combination of factors, including the reserve call-up, labor force migration, and exclusion of Palestinian workers.
- Compensating for the labor shortage through the immediate hiring of new foreign workers, largely from India, will not be feasible due to the ongoing Gaza conflict. Such hiring may only occur after the war ends, involving roughly 120,000 workers.
- The Israeli market requires highly skilled labor for its advanced technology industries. Workers might need six months to a year of training to meet the job requirements.
- The qualitative loss exceeds the percentage, with the technology and industrial sectors suffering a significant blow to their workforce, which has a higher contribution to the national GDP.
- The Israeli economy, characterized by neoliberal policies, heavily relies on the private sector. Consequently, the losses will be most pronounced in the private sector and the stock market, where they will be difficult to quantify, especially the structural, human, and moral losses.
- Many investment deals have been canceled or postponed, with their fate hinging on the course of the war and its outcomes. Most likely, these investments will be delayed or scrapped.
- If the war persists for months, the state’s credit rating will decline, increasing the cost of borrowing and slowing down the recovery process if it happens.
- Israel will not recover from the economic repercussions of the war without expanding the state’s role in the economy, which would shake the foundations and nature of an economy reliant on foreign investments in hard currency, necessitating a restructuring of the economy.
The ongoing conflict in Gaza is having a profound and multi-faceted impact on the Israeli economy, with long-term consequences that extend beyond mere economic figures. The uncertain duration of the conflict, coupled with the complexities and challenges it presents, is a cause for concern. Israel’s path to economic recovery will likely be a protracted and arduous one, requiring significant reforms and adaptation.