Ending war would help Israel’s struggling economy, say experts

JERUSALEM

A person walks his dog past a closed shop to rent in Tel Aviv, Israel, Thursday, Aug. 15, 2024.

In Jerusalem’s Old City, nearly all souvenir shops are closed. In Haifa’s flea market, forlorn merchants polish their wares on empty streets. Airlines are canceling flights, businesses are failing and luxury hotels are half empty.

Nearly 11 months into the war with Hamas, Israel’s economy is struggling.

Prime Minister Benjamin Netanyahu has tried to allay concerns by saying the economic damage is only temporary.

But the bloodiest, most destructive war ever between Israel and Hamas has hurt thousands of small businesses and compromised international trust in an economy once thought of as an entrepreneurial dynamo. Some leading economists say a cease-fire is the best way to stop the damage.

“The economy right now is under huge uncertainty, and it’s related to the security situation — how long the war will go on, what the intensity will be and the question of whether there will be further escalation,” said Karnit Flug, Israel’s former central bank chief.

The Israeli economy has recovered from previous shocks, including shorter wars with Hamas. But this longer conflict has created a bigger strain, including the cost of rebuilding, compensating families of victims and reserve soldiers, and vast military spending.

The drawn-out nature of the fighting and the threat of further escalation with Iran and its Lebanese proxy, Hezbollah, have an especially harsh impact on tourism. Though tourism is not a major driver of the economy, the damage has hurt thousands of workers and small businesses.

With Yemen’s Houthi rebel group endangering ships passing through Egypt’s Suez Canal, many long-haul ships have stopped using Israeli ports as hubs, said a port official who spoke on the condition of anonymity because he was sharing internal information.

He said Israeli ports saw a 16 percent drop in shipping in the first half of the year, compared with the same period in 2023.

Jacob Sheinin, an Israeli economist with decades of experience advising Israeli premiers and government ministries, said the total cost of the war could amount to $120 billion, or 20 percent of the country’s gross domestic product.

The Israeli GDP was projected to grow 3 percent in 2024. The Bank of Israel now predicts a growth rate of 1.5 percent and that's if the war ends this year.

Fitch downgraded Israel’s rating from A-plus to A earlier this month, following similar downgrades by S&P and Moody’s. The downgrading could raise the government's borrowing costs.

“In our view, the conflict in Gaza could last well into 2025,” Fitch warned in its rating note, which cited the possibility of "significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.”