Israel’s Economy Struggles as Gaza Conflict Continues
In the midst of the ongoing conflict between Israel and Hamas, the Israeli economy is facing significant challenges. The war, which has now lasted for nearly 11 months, has taken a toll on businesses, tourism, and international trust in the country’s economy. While Prime Minister Benjamin Netanyahu assures that the economic damage is temporary, leading economists argue that a ceasefire is necessary to prevent further harm.
The war has had a devastating impact on Gaza’s already fragile economy, leaving 90 percent of the population displaced and the majority of the workforce unemployed. In addition, all banks in the territory have shut down. The fighting has resulted in the deaths of over 40,000 people, with no distinction made between civilians and combatants. The conflict has also forced tens of thousands of people to flee their homes along Israel’s borders, causing widespread damage.
While Israel has previously recovered from shorter wars with Hamas, the prolonged nature of this conflict has created a greater strain on the economy. The cost of rebuilding, compensating victims’ families and reserve soldiers, and extensive military spending have all contributed to the economic challenges. Furthermore, the uncertainty surrounding the duration of the war and the potential for further escalation with Iran and Hezbollah have had a particularly harsh impact on tourism.
Although tourism is not a major driver of Israel’s economy, the damage caused by the war has affected thousands of workers and small businesses. Many tour guides, like Daniel Jacob, have seen their businesses dry up, forcing them to rely on government aid. The closure of souvenir shops in Jerusalem’s Old City and the decline in shipping through Israeli ports have further exacerbated the economic difficulties.
According to Jacob Sheinin, an Israeli economist, the total cost of the war could amount to $120 billion, or 20 percent of the country’s gross domestic product (GDP). The Organization for Economic Cooperation and Development (OECD) reported that Israel’s economy experienced the biggest slowdown among its 38 member countries from April to June. The country’s GDP growth rate was initially projected to be 3 percent for 2024, but the Bank of Israel now predicts a growth rate of only 1.5 percent if the war ends this year.
The economic challenges have been further compounded by downgrades in Israel’s credit rating by Fitch, S&P, and Moody’s. These downgrades could increase the government’s borrowing costs. Additionally, the Finance Ministry has reported a deficit of over 8 percent of GDP over the past 12 months, surpassing the projected ratio of 6.6 percent for 2024. These factors have put pressure on the Israeli government to end the war and reduce the deficit, potentially through unpopular measures such as raising taxes or cutting spending.
However, Prime Minister Netanyahu faces challenges in maintaining his coalition, with his hardline finance minister advocating for the war to continue until Hamas is defeated. The former central bank chief, Karnit Flug, argues that the situation is unsustainable and that the government will need to make difficult decisions to address the severity of the economic crisis.
While the unemployment rate has dipped below pre-war levels, many small businesses have closed due to owners and employees being called up for reserve military duty. Israeli business information company CofaceBDI reports that 46,000 businesses have closed since the start of the war, with 75 percent of them being small businesses. Even iconic establishments like Jerusalem’s American Colony hotel have had to lay off workers and consider pay cuts.
Economists agree that the best way to revive the economy is to end the war. Continuing the conflict will only hinder the recovery process. As the war persists, businesses suffer, tourism declines, and the economic outlook remains uncertain. It is crucial for Israeli leaders to prioritize a ceasefire and work towards resolving the conflict to prevent further damage to the country’s economy.