Israel's economy suffers a backlash from the conflict.

CONTRASTING NUMBERS

Before the conflict between Israel and Hamas, the Israeli economy had a relatively solid foundation, with growth of 6.5% in 2022. The national debt-to-GDP ratio had fallen from 71% during the pandemic to 60% – significantly lower than other developed economies such as the US and the UK. However, the ongoing conflict with Hamas, which began in October 2023, is testing the strength of the Israeli economy, and recently released data proves this. Accordingly, Israel's GDP fell by 19.4% in the last quarter of last year – marking the deepest decline since the second quarter of 2020. At that time, lockdowns related to the Covid-19 pandemic forced many Israeli businesses to close, and people restricted consumption, leading to an economic decline of nearly 30%. This decline is particularly noteworthy considering that the quarter immediately preceding – before Hamas's surprise attack on Israeli territory – maintained positive growth of 2.7%. The sharp downturn in the Israeli economy is a result of several factors: private consumption fell by nearly 27%, imports of goods and services decreased by 18%, and investment in fixed assets dropped by 68%, particularly in housing construction. Meanwhile, government spending increased by 88% due to war costs. Besides direct spending on the conflict, the state also had to subsidize housing for Israelis displaced from homes near the Gaza and Lebanon borders, as well as provide financial support to workers and companies affected by the conflict. For the whole of 2023, Israel's GDP growth was only 2.2% compared to the impressive 6.5% of 2022. However, according to economic experts, the figures for the third quarter are not the worst for Israel if the conflict with Hamas continues as it is now. It is projected that in 2024, Israel's economic growth will fall to its lowest level in history, and by the end of 2025, the conflict is expected to cost Israel approximately 255 billion shekels (70.3 billion USD), equivalent to about 13% of its GDP.

The economic slowdown, coupled with rising political risks, led credit rating agency Moody's to recently downgrade Israel's credit rating from A1 to A2 for the first time and change its economic outlook to "negative" due to the risk of conflict spreading to Israel's northern front against the Lebanon-based Hezbollah militant group. However, a positive aspect for the Israeli economy is that the government is demonstrating good management, with economic activity significantly improving in December 2023 compared to the stagnation of October and November, and a possible slight recovery in the first quarter of this year.

"SAVIOR" OF THE ECONOMY

Amidst the negative impacts of the conflict on its economy, Israel's technology sector is emerging as a bright spot, even being hailed as a "savior." The technology sector accounts for 18% of Israel's GDP, approximately half of the country's exports, and 30% of its tax revenue, making its prosperity crucial to the Israeli economy. In the fourth quarter of last year, around 15% of Israel's workforce – nearly 300,000 people – were drafted into the military. However, many reservists have now returned home, providing impetus for a strong resurgence in the technology sector.

Before the conflict broke out, amidst a global slowdown in fundraising for startups, Israeli technology companies still managed to raise around $10 billion. Experts believe that although the conflict made fundraising more difficult, demand for the services of Israeli technology companies remained high because the industry primarily serves international customers. Currently, Israeli technology companies are demonstrating remarkable resilience, as well as the ability to meet product delivery deadlines and maintain business continuity. A highly anticipated event is the recent announcement by the American corporation Intel that it will proceed with its plan to build a semiconductor chip manufacturing plant in southern Israel with a total investment of up to $25 billion – the largest investment ever in Israel. In addition, Israel-based global venture capital fund OurCrowd also stated that a delegation of South Korean investors will arrive in the country in the coming days, despite the extreme difficulty in arranging flights during a conflict. Israel remains confident that it is a vital part of the global technology ecosystem, and therefore its technology sector will overcome difficulties even if the Israel-Hamas conflict continues.

A "SUPERREAL" ECONOMY?

However, the technological bright spot is not enough to erase the negative outlook for the Israeli economy amidst the war. Immediately after Moody's announced the downgrade and revision of Israel's growth forecast, both Israeli Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich dismissed it as "bizarre and politically motivated," repeatedly asserting the fundamental strength of the Israeli economy and claiming that the current difficulties were only temporary. But even Israeli domestic experts have to admit that the national economy is not as "unrealistically" strong as they claim. Accordingly, the prolonged conflict with Hamas will become a significant long-term economic and political burden for the country, especially given the government's management of the situation. Not only will it dampen economic growth, but the conflict in the near future could also weaken executive and legislative institutions and national financial strength. One clear indication is that the financial and diplomatic commitments of Israel's closest ally, the United States, are no longer as firm as they were during the first three months of the war. Prime Minister Benjamin Netanyahu recently mentioned the need for Israel to establish self-sufficiency in ammunition production, demonstrating his awareness of the risks in this area.

Furthermore, although most Israeli reserve soldiers have returned home, statistics show that the lives of at least 600,000 people (approximately 6% of Israel's total population) are severely disrupted, businesses are facing significant financial difficulties, and many have lost their jobs. These will be major drawbacks challenging Israel's growth targets during this conflict period.

Negative economic growth figures pose a major challenge for leader Benjamin Netanyahu amidst growing international opposition to his country's military campaign in Gaza. Even his closest ally, the United States, has shown growing impatience and, for the first time, used the word "ceasefire" in a recent proposal submitted to the UN Security Council. Netanyahu appears to be using the conflict as a means to maintain power, but with unfavorable domestic and foreign policies, his ability to retain power, as well as that of his Likud party, is becoming increasingly slim.