Israel’s economy is under significant strain due to the ongoing war, with Finance Minister Bezalel Smotrich acknowledging that it is the longest and most expensive conflict in the country’s history. The war has led to escalating tensions with militant groups such as Hezbollah and Hamas, resulting in ground incursions and airstrikes in Lebanon, Gaza, and Beirut. Economists fear that the economic costs will continue to rise for Israel and neighboring countries in the Middle East, impacting growth and activity in the region.
The war has exacerbated economic and humanitarian crises in Gaza and the West Bank, while also leading to a contraction of up to 5% in the Lebanese economy due to cross-border attacks between Hezbollah and Israel. There are concerns that Israel’s economy could shrink further, with projections indicating a decline in gross domestic product per head this year. The war has disrupted economic forecasts, with growth estimates revised downward amidst rising inflation and government spending to fund the war effort.
The costs of the war for Israel are estimated to total 250 billion shekels through the end of next year, equivalent to 12% of the country’s GDP. The ongoing conflict with Iran and its proxies, including Hezbollah, continues to strain the government’s finances, with defense expenditures and civilian expenses mounting. The economic damage from the war is expected to persist even after it ends, with concerns about reduced investment and long-term economic consequences.
The government’s response to the economic challenges posed by the war includes potential tax hikes, cuts to non-defense spending, and a focus on defense expenditures. This could lead to a weakened sense of security, higher defense costs, and reduced growth rates for Israel. There are fears of a recession similar to the aftermath of the Yom Kippur War in 1973, which led to economic stagnation as defense spending surged. The departure of highly educated individuals, particularly in the tech sector, could further impact Israel’s economic outlook.
The conflict has led to a doubling of Israel’s budget deficit to 8% of GDP, with increased government borrowing and higher costs of credit for the country. Tax revenues from struggling businesses, which are facing closures and reduced investment due to uncertainty, are unlikely to fill the fiscal hole. The instability created by the prolonged war has affected various sectors of the economy, such as agriculture, construction, and tourism, leading to job losses, revenue declines, and price increases.
Despite the challenges faced by Israel’s economy, there are concerns that the tech sector, which accounts for a substantial portion of the country’s economic output, may not sustain its resilience in the face of ongoing conflict and government policies. The uncertainty has prompted some tech companies to consider incorporating overseas and relocating operations outside of Israel. The future growth of the tech industry and Israel’s economy as a whole hinges on stability in the region and responsible government actions to address the economic fallout from the war.
