War with Hamas may hit Israel’s economy hard

JERUSALEM

Just last month, Israeli Prime Minister Benjamin Netanyahu predicted a new era of peace and prosperity in the Middle East, based on growing acceptance of Israel within the region.

Today, with the Israel-Hamas war in its fourth week, that vision is in tatters.

The mobilization of 360,000 reservists and the evacuation of 250,000 Israelis from their homes has upended many businesses.

Restaurants and stores have emptied. Airlines have canceled most flights to Israel, and tourists have called off trips. A main natural gas field has been shut down, farms have been destroyed for lack of workers and businesses have furloughed tens of thousands of workers.

Israel's economy bounced back after previous wars with Hamas, but this round could last longer, possibly months, because the military's self-declared mission is to end Hamas rule, not just contain the militants.

 A long and possibly multi-front conflict could make it more difficult for the economy to recover than in the past. And even before the war, Israel's economy was smarting from Netanyahu's controversial proposal to weaken the judiciary.

Israel’s Finance Ministry has presented an economic aid plan that includes $1 billion in grants for businesses hurt by the war. Critics say it doesn’t go far enough.

Financial barometers paint a bleak picture. The local currency, the shekel, has reached a 14-year low, while the benchmark stock index is down about 10 percent this year.

The tech industry, the engine of Israel’s economic growth, started bleeding even before the war began.

Fitch Ratings, Moody’s and S&P all warned in recent days that an escalation of the conflict could result in a downgrade of Israel’s sovereign debt rating.

At the start of the war, Israel ordered Chevron to halt production at the Tamar natural gas field to lower the vulnerability to prospective missiles. Energy expert Amit Mor estimated the shutdown could cost Israel $200 million a month in lost revenue.

Even before war broke out, Israel was struggling. Its coffers, once swollen by tech investments, were clobbered by the proposed judicial overhaul.

Concerns about Israel’s governance, rising inflation, and a worldwide slowdown in tech investments last year also weighed on the economy.

Investments in Israeli startups, which attracted a record $27 billion in 2021, sank by almost half last year.

The Bank of Israel calculated that the 2014 war in Gaza cost the economy 0.4 percent of gross domestic product, and the 2006 war in Lebanon pared 0.5 percent, said Professor Michel Strawczynski, an economist at the Hebrew University of Jerusalem.

“I’m expecting a big blow in the last quarter of 2023. It’s hard to say how bad, but I wouldn’t be surprised if it contracts 15 percent in annualized terms,” Strawczynski said.

If the war achieves its objectives, "then we will see a rebound in activity, though we don't know when it will be,” Strawczynski said. “Things will also depend on how many fronts there are. But the important thing is length.”