The impact of the war on Gaza on the Israeli economy

Israel’s GDP is declining due to the heavy losses incurred by the Israeli economy since the start of Operation Al-Aqsa Flood on October 7, 2023, and Israel’s declared war on the Gaza Strip and its massive call-up of the army reserve. This was accompanied by the cessation of most of the agricultural, industrial, service, banking and tourism productive sectors, the impact on foreign investments and trade, the cessation of workers coming from the West Bank and the departure of foreign workers, in addition to the high financial cost of the ongoing military operation in draining Israel financially.

In this context, an internal debate is taking place in Israel about the consequences of the war and its economic cost, and the way to manage the economic file in the war in light of the decrease in physical capital, damage to productive capacity, high unemployment rates, increasing government deficit, and growing fear that its consequences will spread cumulatively to the coming years, as experts predict that it will take a long time to recover after the war.

This paper aims to analyze the situation of the Israeli economy in the context of the war on Gaza, and the effects of the war on its performance and structure, and mainly addresses the heated Israeli debate about the feasibility of the question of the economy as one of the factors pressing on Israel’s continuation of the war for months to come, and the ability of the economic structure to recover given previous crises. One of the objectives of the paper is also to identify the chances of continuing the Israeli war in light of the question of the economy raised and the possibilities of its impact on Israel’s political attitudes towards the continuation of the war or fighting future wars.

First: Previous crises and mechanisms to confront them

The Israeli economy has faced several crises in times of war and high-profile confrontations since the occupation of the West Bank in 1967.

Israel suffered in the October war with Egypt, in 1973, heavy economic losses that brought it into a stage of economic depression, although it later increased its spending on the construction of settlements, and introduced its army into a ground war when it invaded Beirut in 1982 (1), and its economy reached the stage of growth and stability after obtaining American support through a plan to support Israel, in 1985, in which it provided support of up to one and a half billion dollars, which led to reducing inflation rates from 400% and returning them to normal at 16.5%, economic growth continued at a rate of nearly 5% annually and unemployment rates reached only 4%.

In 1987, the First Intifada caused losses to the Israeli economy due to its dependence on cheap Palestinian labor and the exploitation of the Palestinian consumer market, and Israel entered an economic recession and suffered a loss of $ 1.2 billion in 1988, and the rates of increase in gross national product declined from 5% in 1987 to 1% in 1988, and then increased contraction in 1989. According to indicators, the intifada was incurring losses to the Israeli economy of NIS 5 million per day, cumulatively reaching NIS 1.5 billion-2 billion annually, and different Israeli estimates showed that the size of the losses exceeded that and ranged between $ 3 billion and $ 4 billion, and unemployment reached 10%. This result was contributed to by the damage to the tourism sector, the decline in tax revenues earned by the Israeli Civil Administration from Palestinians, and the increase in military expenditures due to the Israeli government’s tendency to suppress the intifada. This loss opened the door to Israeli discussions of separation from the Palestinians, as “mutual interest” turned into a source of damage to the Israeli economy.[2]

In the period of the second intifada in 2000-2004, the Israeli economy was subjected to a recession, as per capita GDP decreased and unemployment rates increased, after the nineties, in which the economy witnessed a boom and growth in GDP ranging between 5 and 6% annually in the first half of the nineties, and between 3-4% in the second half of the same decade, and reached 7-8% in 2000. Israel’s per capita level reached the level of developed countries (about $18,000 a year), and GDP began to decline with the outbreak of the intifada in 2000. Israel’s losses in 2000, 2001, and 2002 were estimated at 2 billion, 6 billion, and 12.7 billion, respectively, due to the disruption of productive sectors, the suspension of the entry of Palestinian workers into Israel, the imposition of a security embargo, the reduction in exports to the West Bank, the decline in tourism, increased military spending, and the prevalence of instability in the situation on the ground. As a result, expectations emerged that the street could increase opposition to the Israeli government, which was engaged in confronting the Palestinians, and its call to replace this with a return to negotiations, but what happened was the opposite, as Israeli society supported in the Knesset elections, most of which supported the Likud Party, which adopted the idea of suppressing the intifada at the expense of the Labor Party, which adopted a strategy of returning to negotiations with the Palestinians(3).

What distinguishes the current Israeli war on Gaza is that its cost exceeds all the wars with the Gaza Strip, the longest of which was the 2014 war that cost Israel about 20 billion shekels (8), while most of the previous complex crises show that Israel resorted to requesting American aid to bridge the financial deficit during the wars despite them being short-term crises associated with short wars compared to the current war, which has lasted for more than two months so far. The initial estimates of the war losses show that it exceeds what Israel went through during the Corona pandemic, and that it differs from its predecessors in the size of the measures Israel is taking such as the evacuation of residents from areas adjacent to the Gaza Strip and the northern borders, and the imposition of restrictions on economic activity and the work of institutions and sectors, including education.

The Israeli government worked to confront this crisis through a package of measures that began with approving the war budget of $8 billion, and approved policies to mitigate the damages inflicted by the war on commercial interests and compensate them with financial amounts after being subjected to a decline of 25% in the first month of the war (9). In addition to the decision of the Ministry of Social Affairs and Social Services to compensate those affected who are unable to reach their workplaces. Israel also requested assistance from the United States, which in turn announced through the American president, Joe Biden, and with the approval of Congress, that it would provide support of up to $14.3 billion, most of which was allocated to military aid, and part of it to civilian aid (10), in addition to mobilizing two American aircraft carriers to the Mediterranean Sea to limit the expansion of the war and reduce its economic and military cost on it (11).

At the level of monetary authorities’ measures, the Bank of Israel activated the “repo” auctions, through which the bank allows small and emerging companies affected by the war to conduct repurchase transactions and obtain credit financing at preferential interest rates that guarantees the flow of funds in the economic system (12).

The Israeli government sought to operate farms by placing mobile reinforced shelters in agricultural areas near Gaza and southern Lebanon (13), and opened the door for volunteering and employing part of the army (about 500 soldiers) to work in agriculture in the north and south, and the Ministry of Agriculture is trying to find incentives to encourage work in agriculture but it faces a shortage of labor (14).

Second: Implications of the war

Official and unofficial economic bodies in Israel limited their readings on the economic effects and losses, and their expectations for the accumulation of the current war, and the most prominent results were:

Decline in GDP and high level of public debt: Before the start of the war, the Israeli economy witnessed a state of growth and stability after recovering from the effects of the Corona pandemic; Israel’s GDP in 2022 amounted to about $522 billion, equivalent to $54,659 per capita (NIS 184,000 annually), and GDP recorded a growth of 3% in the second quarter of 2023, and it recorded a growth of 6.5% in 2022, and 9.3% in 2021(15). Pre-war interest rates reached a degree of stability not reached in 17 years, and the debt ratio fell below the global level (less than -61%) (16), while unemployment rates fell from 4.3% in 2021 to 3.5% in 2022, and price inflation rates rose from -0.60% in 2020 to 1.5% in 2021, reaching 4.4% in 2022 (17).

In the first post-war statistics, the Israeli Central Bureau of Statistics recorded a decline in GDP for the third quarter of 2023 by 2.8%, recording approximately NIS 479 billion ($129.4 billion) (18). The Bank of Israel estimated the size of the decrease in the gross national product by 3% by the end of 2024 (19) due to the expected high costs of the war, whose numbers varied between several parties, as the company “Capital Markets for financial consulting” published a report in which it expected that the cost of the war would reach about $48 billion, of which Israel bears two-thirds, and America provides a third in the form of military aid, while the Israeli Ministry of Finance expected that the ongoing war will cost the economy $270 million per day, while the governor of the Central Bank predicted Israeli losses amounted to $52 billion (approximately NIS 198 billion), which constitutes 10% of GDP, prompting Israel to borrow (20).

The debt-to-GDP volume, according to the Bank of Israel, will reach 66% by the end of 2024. This is due to the increase in “defense expenditures” estimated at $260 million per day for the army and the Iron Dome system, the issuance of government decisions to help displaced Israelis in the Gaza Strip and the affected areas, and the decline in tax revenues due to the war. In this context, the Bank of Israel estimated that the costs of the war on Gaza will add to the government budget an amount of 26 billion shekels (7.02 billion dollars) during 2024 under defense expenditures, bringing the total added expenditures to about 46 billion shekels (12.4 billion dollars), and the size of the debt remains subject to the bank’s consideration of the volume of aid that the United States will grant to Israel, and the expenses of reconstruction projects and other civilian expenditures, and the war is expected to cause a budget deficit of up to 3.7% of the GDP and 5% of GDP for 2023 and 2024 respectively (21).

High inflation and interest rates: Based on the expectations of several parties, including the Bank of Israel, which expected the inflation rate to reach 2.4%, while the interest rate will reach 3.75/4.00, and the capital market believes that the inflation rate will reach 2.6% and interest rates 3.3/4.00. These figures are due to an increase in the value of demand for services, while supply decreases due to labor shortages due to reserve recruitment, which has led to an increase in the price of services. Interest rates will stabilize financial markets and support domestic demand. (24)

The labor market and expenses have shrunk due to the recall of reserves: reserve salaries are estimated at $1.3 billion per month, and their recall to the army causes a shortage of labor supply in other branches of the economy (25), where the total reserve called up (300-360 thousand soldiers) constitutes 8% of the labor force in Israel, who were previously on the job (26), while the rest of the reserve consists of university students, academics and other sectors, including retirees and others.

The decline of the productive sectors, especially agriculture and industry: The losses of the Israeli labor market are estimated at $1.2 billion per week due to the disruption of the productive sectors as a result of the lack of labor, part of which joined the army, and the owners of farms and projects left agricultural crops to be destroyed without picking them, especially in the southern regions, and Israel resorted to importing vegetables from abroad (27).

The main problem arises after the agricultural sectors were also affected by the evacuation of Thai and foreign workers working in agriculture (estimated at 7,800 workers out of 30,000 workers), the prevention of an estimated 20,000 Palestinian workers from entering Israel, the unwillingness of commercial truck drivers to go to farms to transport goods under security restrictions through checkpoints and closures, and the restriction of daily working hours to periods not exceeding three hours. Statistics estimated that the Gaza Strip cover area constitutes a food basket for Israel, where its production covers 75% of the public consumption, and 60,000 dunums of vegetables are grown, which covers 20% of Israel’s needs of fruit, and 6.5% of milk because it contains a number of animal and poultry farms (28), while the Galilee and Golan region is a source of egg production with 73% of public consumption, 50% of which is produced in settlements near the border of Lebanon, which were damaged by Hezbollah operations. God, while the same region produces 40% of the fruit needs in Israel. (29) This loss prompted Israel to import 10,000 liters of milk and 50 million eggs from abroad per month for three months. (30)

As for the industrial sector, a number of international companies announced the closure of their branches and factories in Israel, some of which asked their employees to work from home. Other reports showed a decrease in the volume of production of Israeli high-tech industries by 56% during the end of this year 2023, and the number of their transactions decreased by 38% due to the constitutional crisis in Israel, passing through the recent war (31).

Depletion of investment reputation and decline of the stock market in Israel in the absence of security: where the volume of investment declined, especially in the technological sectors, the agency for global economic estimates (Moodis) reported that Israel’s rating has become negative in terms of investments, which will be reflected in its ability to attract new investments (32). The stock market fell by 10% in the first week of the war, (33) and the leading indices on the Tel Aviv Stock Exchange suffered sharp declines, and the index fell by 13% and 16.9%, respectively, due to the sharp increase in uncertainty in the Israeli economy. The level of risk arising from the downgrade of Israel’s credit rating is also rising, with additional consequences for the economy. (34)

Layoffs from the West Bank and Gaza Strip and the departure of foreign workers: Immediately after Operation Al-Aqsa Flood, Israel laid off tens of thousands of West Bank and Gaza Strip workers working in all sectors, cancelled their permits, along with the departure of tens of thousands of Asian workers, especially Thais, and announced that it needed more than 170,000 workers to cover the shortage of labor supply. (35). Official statistics reported that 85% of this sector collapsed due to this crisis, as Israel laid off about 80,000 Palestinian workers working in it, 4,000 foreign workers out of 24,000 workers, while about 3,500 Palestinian Arab workers inside Israel stopped working out of 14,000 workers. (36)

High unemployment rates in Israel: According to Bank of Israel statistics, the unemployment rate increased in the fourth quarter of 2023 from 3.6% to 4.3% by the end of the year, with expectations to reach 4.5% in 2024 (37). The Israeli Bureau of Statistics estimates that 800,000 workers constituted 19% of the workforce in the first month of the war, including army reservists, 8% of whom are employed, and the rest are university students, and nearly 60,000 people applied for unemployment benefits from the government during the first month of the war (38).

The cost of evacuating settlements: Some statistics estimated that the cost of evacuating settlements adjacent to the Gaza Strip and from the northern settlements amounts to 10 billion shekels annually, and this amount includes salaries and allowances for them, the provision of temporary alternative housing, and the repair of destroyed houses (39).

The Israeli shekel fell against other currencies: its value against the US dollar exceeded the barrier of 4.08 shekels, a value it had not reached in 12 years, and returned to range at rates of 3.70-3.75 shekels to the dollar, as the Bank of Israel had sold $8.2 billion out of the $30 billion of cash reserves it intends to sell to protect the shekel, two weeks before the war. This change is due to the war and the decline in the value of the dollar globally, however, Israeli experts have suggested that the shekel may collapse again due to the war (40).

Impact on foreign trade: The targeting of Israeli ships passing through the Bab al-Mandab Strait in the Red Sea by the Houthi group “Ansar Allah” in Yemen, in order to prevent their transit, was a pressing factor affecting Israel’s international trade, as ships were forced to travel through the Cape of Good Hope maritime line, which added more than 13,000 nautical kilometers to the distance traveled by ships and increased 14 days over the time taken, which led to an increase in shipping rates by 9% between Asia and the Mediterranean, in November 2023, by 16-36% between the ports of Israel and China, and insurance prices increased between $20-80 per container (41).

Losses on the tourism and aviation sector: Israeli statistics estimated that the number of passengers through Israeli airports decreased from an average of 80-90 thousand passengers per day to nearly 11 thousand passengers, and the waves of tourists departing have increased since the beginning of the war, and the two largest Israeli airlines (El Al and Israel Airlines) suffered huge losses that have not been counted. In terms of cruises, international cruise companies, such as Royal Caribbean, have cancelled all cruises that were supposed to start from August 2024 for their ships carrying approximately 2,500 passengers across the Mediterranean, due to the security situation (42). In the context of these losses, the Israeli government provided a $6 billion government guarantee plan to insure airlines against the dangers of war and to continue their operations (43).

Fifth: The Israeli Debate on the Economy and War

There are two basic views on the repercussions of the war and its economic cost in Israel.

First opinion: A large number of economic analysts and institutions believe that the shaking of the Israeli economy came as a result of the “Al-Aqsa Flood” operation and its consequences, and the policy of Netanyahu and his Minister of Finance, Smotrich, in dealing with these repercussions, and the proponents of this opinion – who did not express their opposition to the decision to war – attributed the reasons for the failure to the government’s policies in dealing with this crisis, and that their policies will lead to a global distrust of the Israeli economy. 300 of them sent a letter to Netanyahu and Smotrich, including those who hold or have held senior positions in economic institutions such as the Bank of Israel, Nobel laureates in economics, professors and analysts who called for changing priorities by diverting expenditures in favor of addressing the damage and those affected and reviving the economy, stopping funding areas that are not in the interest of the war effort, rebuilding the economy, canceling all spending items that were put in the 2023 budget, and knowing the magnitude of the crisis to prevent a slide into deep economic consequences and reduce the Israelis’ trust in the government hinders Israel’s ability to recover in the future (44). Some of them tended to liken the next crisis to 2002, which lasted for two years in the second intifada, in which the economy witnessed a deficit in the public budget that did not pay attention to covering military expenses, which led to the collapse of the Israeli shekel, which exceeded 5 shekels against the US dollar, and then Israel went to the United States to request financial aid. In the context of this war, experts warn of prolonging the war because of its consequences, and the possibility of Israel slipping into wars with other fronts such as Lebanon that will exacerbate the depth of the crisis (45), and part of this discussion is represented in the writings of a number of economic analysts, who fear the idea of Netanyahu’s “arms economy” and the dispersion of his money.

The second opinion: It is based on mitigating the impact of the war and downplaying the importance of causing economic contraction, a trend linked to the government and analyzes reality from this perspective. This included the statements of the Central Governor of the Bank of Israel, Amir Baron, during his participation in an international conference, in which he stressed the strength of the Israeli economy and that he “knows how to recover quickly from economic crises as happened in recent years,” noting Israel’s progress in the fields of innovation and high-tech, with the aim of reassuring foreign investors, and raising global confidence in the Israeli economy after it reached a precarious level (46). This also includes the statements of the Israeli Foreign Minister, Eli Cohen, that the war will not affect the Israeli economy, but will witness growth after the war because he expects an increase in immigration rates to Israel, and the strength of the economy in the fields of technology and innovation (47). Proponents of this trend say that Israel and its monetary institutions have realized the economic risks by taking advantage of these experiences, while some of them do not underestimate the possibility of slipping things into other fronts in the confrontation more deeply, including the northern front (48). There is some support because these economic losses are part of the price that the Israelis will pay to reach the required level of security through the war directed against the Gaza Strip.

It appears that most of the ongoing economic debate in Israel did not go beyond tactical matters to manage the economy and deal with priorities, and the discussions did not reach to consider the continuation of the war or stop it from the entrance of the economy, or oppose the idea of war, and their opinions revolved around the extent of Israel’s ability to recover economically after the war, in addition to its ability to adapt in light of the continuation of the war by putting an end to the slippage of the economy and dealing with the logic of priorities.

Economic impact on the decision to war

Some future scenarios for possible Israeli political orientations can be developed from the perspective of the economy and based on the data and reading the internal positions that contributed to determining these scenarios. Specifically, there are two scenarios, the scenario of stopping the war by paying the economic cost, and the last scenario that the economic cost does not affect the continuation of the war.

The first scenario: the economic cost does not affect the continuation of the war: Despite the economic losses and the high cost, the scenario of continuing the war is presented for various reasons, the first of which is the continued support of the United States and European countries for Israel financially and militarily, and the placement of two aircraft carriers and American military capabilities at Israel’s disposal, and the second is Netanyahu’s limited options and exposure to the arrows of the opposition by holding him absolutely responsible for the success of the “Al-Aqsa Flood” operation and his intelligence and security failure. Added to this are the multiple indicators that show the indifference of Netanyahu and his finance minister, Smotrich, to the economic consequences of the war and its financial cost. As Israel is accustomed to in its short wars, the predominance of military objectives as existential strategic objectives outweighs the interest in the economic consequences and consequences and their accumulation in the future, and that the economy for Israel is one of the pillars that can be restored, even if it is long enough, and even if the voices of opposition are louder from within, Netanyahu distributed the burdens of war to the emergency government that he formed and obtained legitimacy for it through the Knesset before declaring war.

The second scenario, stopping the war by paying from the economic cost: It is a weak scenario despite the upcoming cumulative impact of the war on the economy, as the opportunity to consider the economy as one of the main obstacles to the continuation of the war remains weak in light of the failure to include the request to stop the war in the demands of those who demanded Netanyahu to amend his plan and spending priorities in the war, in addition to the escalation of the opinion of the other current that denies the existence of deep effects on the economy as a result of the war. This denial of the impact of the economy means that the government is not now prioritizing economic interventions in light of the preponderance of Israel’s security objectives, and talk of a package of policies that will alleviate the size of the crisis in the near term.

The scenario of stopping the war due to economic pressure can succeed if the factors supporting Netanyahu and his government change, the first of which is the decline in American support for Israel or the change in the American decision regarding the war, especially in light of the talk about emerging differences between Biden and Netanyahu over political solutions after the war, and the second: prolonging the war and deepening Israel’s military losses in a way that forces it to retreat or search for political solutions to get out of the crisis, and the deepening of internal differences and criticism of Netanyahu over the items of the current budget (2023) can also contribute to deepening differences and internal criticism of Netanyahu over the current budget items (2023). The 2024 budget, most of which is related to funds deducted or intended to be deducted from Israeli parties and coalitions during the next budget, shifts opinions towards pressuring the government to stop the war or reduce operations.

Conclusion

In view of the prevailing debate in Israel on the question of the economy and its impact on the war, it appears that political and security factors put more pressure than the economic factor on the decision related to the war and its continuation, and despite the economic losses incurred by Israel, it believes that achieving security and the deterrence equation is the appropriate strategic argument with which to confront the economically damaged street, and considers it an entry point to the restoration of the affected sectors, and to the return of settlers to the Gaza envelope in a better situation than it was before October 7, 2023, without The continued threat from the Palestinian resistance factions in Gaza. Israel’s ability to confront this crisis, which exceeds the magnitude and impact of all previous crises, depends on the possibility of adapting to the unstable situation due to the continuation and deepening of the war, as the accumulation of economic losses for Israel leads to negative consequences on its regional status and weight based on the volume of its industrial and technological production globally.

About the Author

Hamdi Ali Hussein

A researcher interested in the Palestinian political field, he holds a Master’s degree in Public Policy from the Doha Institute for Graduate Studies in Qatar and a Master’s degree in International Studies from Birzeit University, Palestine. He has several publications and researches, including: “The repercussions of the 1967 war on the Palestinian national project”, and “Arab normalization agreements with Israel and their political dimensions on the Palestinian cause”.

REVIEWER

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35. Ibid.
36. Ibid.
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40. Ibid.
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46. Ibid.
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