The war has turned life upside down, hundreds of thousands of reserve soldiers have been called up and 2,000,000 people have been displaced from the border areas to the north and south.
In ways that are often less visible outside the country, the war has also damaged Israel's economy. Tourism has virtually come to a standstill and government spending has skyrocketed.
The blow to tech companies has shaken confidence in a sector that has become a key driver of Israel's economy.
The induction of 3,50,000 army reservists disrupted the operations of many companies. According to a survey by the Israel Innovation Authority, a government-funded agency, and the Start-Up Nation Policy Institute, many customer orders were put on hold or canceled altogether and investors got cold feet.
Israel's technology sector has grown rapidly over the past decade, accounting for nearly half of all exports and a fifth of economic output, the Israel Innovation Authority said.
As a result, the Organization for Economic Cooperation and Development said the war would lead to a “temporary but significant slowdown” in Israel’s economy.
Before the Oct. 7 attacks, growth was up about 3 percent and is expected to slow to 1.5 percent this year. Labor shortages, lower consumer and business confidence and higher inflation are weighing on the economy.
Another concern is foreign investment, which was already weak before Oct. 7 due to uncertainty stemming from the dispute between Prime Minister Benjamin Netanyahu's right-wing government and Israel's Supreme Court, said Jonathan Katz, a former economic forecaster at Israel's Finance Ministry.
“The question now is whether foreigners want to continue investing in Israeli high-tech or whether they would prefer to invest their money in a safe and quiet place like Ireland,” Katz said.
In a bid to stimulate the flagging economy, the Bank of Israel cut interest rates last week by a quarter point to 4.5 percent. It was the first interest rate cut since the start of the Covid pandemic and central bank governor Amir Yaron said further cuts were expected.
Yaron said that the economy had already adapted to wartime conditions and was showing signs of recovery, but that the impact of ongoing hostilities would be significant.
In particular, he stressed the importance of stability and the need to contain rising government spending, which the central bank expects to contribute to more public debt and higher deficits.
“It is clear to all of us that the current economic uncertainty is very closely related to the security situation and the development of the war,” said Yaron.
Israel has taken several steps to curb insecurity, including stabilizing the Israeli shekel.
The government plans to increase the number of foreign workers allowed in the country from 50,000 to 70,000 to address a sudden labor shortage. Foreign workers have fled and more than 100,000 Palestinians in the West Bank have been banned from working in Israel.
In recent weeks, the military has also begun withdrawing several thousand soldiers from the Gaza Strip, at least temporarily, due in part to the economic consequences of such a massive deployment of reservists.
Nevertheless, on January 1, Yaron issued a stern warning to Netanyahu about fiscal priorities at a time when more spending must go to defense and security, as well as urgent domestic needs such as the livability of communities near the borders with Gaza and Lebanon. after they were attacked by Hamas and Hezbollah fighters. Criticism of the Netanyahu government's funding of West Bank settlements and the ultra-Orthodox has intensified since the war.
“If we do not act now to adjust the budget by cutting spending, eliminating redundant ministries and increasing revenues in light of wartime needs, the economy will likely cost much more in the future,” Yaron said.
The war in Gaza, one of the longest Israel has ever waged, is already having an impact on the entire economy.
The construction sector, which accounts for 14 percent of Israel's economy, has declined due to labor shortages. Although volunteers helped, the departure of foreign workers and the loss of Palestinian workers resulted in fruits and vegetables rotting on trees and fields.
Additionally, some imports are in short supply as attacks by Yemen's Houthi rebels have disrupted transportation through the Bab el-Mandeb Strait.
Tourism experienced an immediate crash on October 8, just as it was recovering from the Covid pandemic, government officials said.
“There is nothing – no Israeli tourists, no non-Israeli tourists, no weddings, no pre-wedding henna celebrations, no housewarmings. Nobody is celebrating,” said Tomer Bent, who runs King David Treasures, a Judaica shop in Jerusalem’s popular Ben Yehuda Street arcade, which is usually bustling with people eating pizza and falafel or drinking coffee at streetside restaurants.
“But it’s getting better,” Bent said, pointing to the sky. “We believe in him.”
Shops on Ben Yehuda used to stay open until midnight in late December when American tourists visited during the winter break and Christmas holidays, said Moshe Saudi, who managed a gift shop. Now they are closing early.
Israel's Innovation Authority has $100 million in government funding to support tech companies, particularly startups, that have lost funding.
The sector was encouraged by last month's announcement that semiconductor giant Intel would move forward with a planned $25 billion investment to expand a chip factory in southern Israel after receiving a $3.2 billion grant from the government had received.
“All our entrepreneurs understand that no matter how much our customers abroad support us and sympathize with us, if we cannot meet our obligations, they must move on,” said Dror Bin, general manager of the Innovation Authority.
Shortly after the outbreak of war, the organization launched a new advertising campaign to increase trust in Israeli technology companies despite the war. The slogan: “Israeli technology delivers.” NO MATTER WHAT.”
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