The Israeli economy after the Hamas attacks of 7 October 2023: is a crisis brewing?

Source: Times of Israel, 30 October 2023

The horrific Hamas attacks on 7 October 2023 in Southern Israel led to the killing and maiming of thousands, primarily civilians.  This in turn has unleashed Israel’s brutal war on Gazans. While one is preoccupied with the death and destruction in Gaza that are beamed live on TV, especially by Al Jazeera, disappointing news within Israel on the economic front is building up. Here is this vivid commentary by one analyst.

“Businesses are operating with skeletal staff, if at all. Major Israeli employers have announced furloughs. Traffic is light because so few people are commuting to work. Non-essential services are being cut or reduced, from recycling to library hours. Schools that had been shuttered since before the war are starting to reopen, but on reduced schedules because they can’t have more students than can fit into their bomb shelters. Universities are closed until December — at least.

With shipping traffic to Israel disrupted and international flights sharply reduced, Israelis are experiencing shortages. Some local food manufacturers can’t staff their factories or pick the produce in their fields because they depend on Palestinian day laborers who are now barred entry into Israel or Thai farmworkers who left after at least 24 of their compatriots were killed in Hamas’ attack. The first week of the war, supermarkets ran out of tomatoes and cucumbers. Last week it was eggs.

Tourists have disappeared, entertainment venues, and many restaurants remain closed, and shuttered museums are moving important holdings to safe places.

Israel’s hotels are bursting at the seams, however, filled with many of the 200,000 or so Israelis who have been evacuated from their homes near the front lines. This already small country, roughly the size of New Jersey, feels even smaller with areas near Gaza and Israel’s northern border now closed military zones. Every day the authorities announce more evacuations.”

In terms of the aggregate economic metrics, the current situation appears grim. The shekel has hit a 14-year low; the stock market is down by 10 percent. International credit rating agencies are making ominous declarations of a downgrading of Israel’s sovereign credit rating.

A former head of the research department of the Central bank expects the third quarter GDP growth to decline by as much as 15 percent from a projected growth rate of 3 percent for the same period. Of course, in the past, the economy has rebounded quite quickly – as in the case of the 2006 and 2014 wars with Lebanon and Gaza respectively – but a lot depends on how long the current conflict is likely to last and whether it will spread across the region.

More recently (30 October 2023), 300 top economists stressed Israel is facing an ‘economic crisis’. They called on (Prime Minister) Netanyahu and (Finance Minister) Smotrich to act in a different way.

“You do not understand the magnitude of the … crisis that Israel’s economy is facing, you must act in a different way,” the letter says. “The severe blow that has befallen the State of Israel requires a fundamental change in the order of national priorities and a massive diversion of budgets in favour of dealing with war damage, aid to victims, and rehabilitation of the economy. In our estimation, expected expenditure following the war will amount to tens of billions shekels.”

This proclamation is likely to militate against the negotiated transfer of so-called ‘coalition funds’ –worth tens of billions of shekels – to support controversial and idiosyncratic projects of the Ultra-orthodox (Haredi) community. This community has potent political clout. Haredi Jews in Israel currently account for 13.6 percent of the population and, given their very high birth rates, projected to become 16 percent by 2030. What is germane to note is that Ultra-orthodox Jews have very low employment rates. Not surprisingly, this worries economists and financial analysts. Thus,

“the Finance Ministry’s Budgets Department head Yogev Gardos warned that the allocation of funds to ultra-Orthodox institutions and initiatives creates negative incentives for Haredi men to seek employment and will harm the labour market and the economy as a whole.”

Here are some grim projections made by the Finance Ministry’s Budgets Department head.

“Even before the implementation of the government’s decision and its expected negative effects on the economy, with no change in the employment rate among ultra-Orthodox men, the loss of cumulative GDP until the year 2060 is expected to be NIS 6.7 trillion,”

… if more Haredi men are not encouraged to work, by 2065 the government will have to increase direct taxes by 16 percent to maintain the same level of services that it provides without increasing the deficit.”

Hence, it is plausible to argue that the tension between the need to maintain the support of an important political constituency and the current budgetary and financial realities unleashed by the war is likely to increase. Whether the current government can resolve this tension remains to be seen. The longer the war continues, and the more it escalates across the region, the greater the adverse economic consequences. It seems that an immediate cease fire is an economically rational strategy.