Israel’s Economy Hit Hard by War But Expected To Bounce Back

Military spending, a reduced workforce, and evacuated communities have all had consequences for the economy, but economists say that Israel can recover as long as the government makes smart policy decisions

The current Israel-Hamas war is taking an economic toll as well as a human one, but experts say that Israel may be able to weather the shock and even end the war with a stronger economy, if the government responds correctly to the crisis.

After Hamas launched its unprecedented terrorist attack on Oct. 7 and slaughtered 1,400 people in one day, Israeli Prime Minister Benjamin Netanyahu declared war and launched an operation in the Gaza Strip, vowing to eliminate Hamas. Some 350,000 reservists were called up, to be stationed both in the south and on the northern border, responding to daily attacks from Hizbullah.

Over 126,000 civilians from communities near the Gaza border in the south and the Lebanese border in the north have been evacuated and are being hosted in hotels, community centers, and other facilities around the country. Businesses across Israel have been severely affected by the war, with 61,000 workers currently on unpaid leave.

Even greater than the costs of housing evacuated civilians or providing support for affected businesses are the direct military expenses, Idan Azoulay, chief investment officer at Sigma Investment House, told The Media Line.

However, he said that there are so many direct and indirect factors affecting the economy that it is impossible to calculate the daily cost of the war while it is ongoing.

Elise Brezis, a professor of economics at Bar-Ilan University and head of the Azrieli Center for Economic Policy, told The Media Line that previous wars have cost Israel between $500 million and $1 billion each month.

According to Azoulay, Israel is in a financial position to sustain the war for quite a while.

“Israel went into this war with a very good situation. The debt-to-GDP ratio is very low compared to other countries,” he said.

A low debt-to-GDP ratio means that an economy generates a level of goods and services that allows it to repay debts without needing to take on additional debt.

Azoulay said that Israel’s debt-to-GDP ratio was 59% when the coronavirus pandemic struck. During that crisis, the ratio grew to 70%, but less than two years later it was back below 70%.

He also said that the United States will financially support the war.

Last week, the Republican-led US House of Representatives passed a $14 billion aid package for Israel. The bill, which provides aid only for Israel and not for Ukraine, is not expected to pass in the Senate. US President Joe Biden has threatened to veto the bill if it does pass, calling instead for a more expansive $106 billion aid package for Israel, Ukraine, and other security priorities.

While Israel is in a position to make it through the war financially, its economic outlook after the war has to do with the policy decisions it makes now, Azoulay said.

He cautioned the government against continuing to allocate funds to the coalition committees, saying that doing so will not support Israel’s economy and will draw out the time required for the economy to recover.

“If they hold the funds and they manage them better than what they have done so far … I think that Israel can recover from this war very well,” he said.

Brezis, too, said that money provided to the coalition parties is essentially wasted and will lead to a higher deficit.

She said that Israel’s low debt-to-GDP ratio, currently 60%, means that Israel can weather a deficit increase. Even a debt-to-GDP ratio increase to 80% would not endanger Israel’s economy, she said.

“The deficit will be essentially financed by issuing bonds. I am sure that there will be no problem on this side,” she said.

Brezis said that the 2024 budget will have to move funds from civilian allowances to finance the war as well as rebuilding the south.

She noted that the shekel has also been weakened as a consequence of the war.

“But the Bank of Israel knows what to do since we have foreign currency reserves of $200 billion,” she said.

Israel’s economy is also strong enough to handle the reduction in workforce and the resulting drop in GDP caused by evacuations and the mass call-up of reservists, she said.

Brezis said that Israel ought to handle unemployment similarly to the way it did during the pandemic, when the country provided payments for the citizens who were put on unpaid leave by their employers.

The government’s ability to do so, though, may be hampered by personnel issues.

“This administration has thrown out all the good people and has nominated incompetent ones,” Brezis said.

The tech sector, which makes up a significant part of the Israeli economy, will have to adjust to a smaller workforce, since many of its workers have been called up to the reserves.

War can be a trigger for structural changes that need to be done in the economy, such as allocating funds more effectively, more economically

“The young CEOs will have to find solutions,” Brezis said. “They know how to work under pressure. They may find new solutions to the difficulties.”

The difficult situation might lead the government itself to find new solutions to entrenched problems, Azoulay said.

“War can be a trigger for structural changes that need to be done in the economy, such as allocating funds more effectively, more economically,” he said.

He also said that in previous wars, Israel saw a large influx in investment money once the fighting ended.

“We can go out of the war in a much better way than the way we got into it, hopefully,” he said.