Predictions that the October 7 attacks and Israel’s war on Gaza would have a devastating impact on the regional and global economy have, thus far, proved wide of the mark. Israel’s economy has proved to be resilient and better able to withstand a prolonged conflict than at the time of the second Intifada of two decades ago.
No economy could be unaffected by the budgetary costs of prosecuting a long war. The call-up of 350,000 reservists, many working in key sectors such as technology, is a heavy blow that is having an impact on economic growth. Nevertheless, the national unity of purpose serves to limit the consequences of war.
After an initial currency collapse at the start of the conflagration, the shekel has bounced back strongly. It is now worth three per cent more against the dollar than on October 7. Blessed with strong foreign exchange reserves, the Bank of Israel was able to come to the rescue with a large- scale intervention in the foreign exchange markets.
Fears that a wider conflagration could lead to an Opec oil embargo, similar to that which followed the Yom Kippur War, have proved wide of the mark. Recent attacks by Houthi rebels on shipping in the Red Sea are disruptive with British oil giant BP and the container behemoth Maersk re-routing sailings. But the impact has so far been limited after a show of US and British naval power.
The strains of conflict on Israel’s budget are manifest. The Finance Ministry is budgeting for a war that will stretch for at least two months into 2024. The result will be a near tripling of the nation’s budget deficit to $14 billion (£11 billion) next year. Total defence spending has escalated by £8.7 billion since the war began. This, together with the extra cost of domestic security and civilian displacement, means the Israeli government’s total spending will be over £122 billion in 2024. The budget deficit (the difference between what the government spends and collects in taxes) rises to 5.9 per cent of the nation’s total output from an original target of 2.25 per cent. That compares to a deficit of 3.3 per cent across the Eurozone in 2023 and around 3.8 per cent in the UK.
A scarcely reported narrative is that as many as 300,000 Israelis (both Jewish and Arabs) have been displaced. These people have had to abandon their farms, villages, Kibbutzim and work stations at considerable cost. The often disparaged Finance Minister Bezalel Smotrich has vowed to avoid increasing the financial burden on ordinary families during the war and to make sure there is a “very large plan for the benefit of reservists and their families”.
In Britain headlines are commanded by 0.1 per cent fall in national output over any single quarter. In Israel, the collapse in total output or GDP in the final quarter of the year is estimated to have been 19 per cent. In spite of this, there is no current forecast of recession in 2023 with the economy still expected to expand in 2024.
Israel is no longer a young orphan state propped up by German reparations and American assistance. It is a high-tech economy that lost only 1.9 per cent of output in the pandemic, against 4.9 per cent across the OECD. It grew by 8.6 per cent in 2021 and 6.5 per cent last year.
The thriving start-up sector contributed to half of Israel’s exports in 2022 and makes up 15 per cent of national output. Before the current hostilities the country sat on $200 billion (£154 billion) of cash reserves. It was this cushion that allowed the Bank of Israel to step into the markets, spending $30 billion on intervention to support the currency and keeping the banking system liquid.
Israel’s debt to GDP ratio of 60 per cent (prior to the war) is something most European economies can only dream of. Most remarkably, it is also energy self-sufficient as result of gas discoveries off its northern shores, which are partly refined in Egypt and connected to Cyprus by pipeline. At the same time Israel is deploying its tech skills to block the funding of Hamas by freezing crypto currency accounts used to solicit and receive donations. Qatar, traditional provider of economic support to Gaza, is currently prevented from providing funds as it seeks a peacemaker role.
There will be severe economic costs for Israeli citizens and taxes may eventually have to rise to pay for the war. The Knesset finance committee favours one-offs, such as a windfall levy on the banks, rather than a hike in income taxes. But as investment bankers Goldman Sachs note: “Israel’s economic and financial vulnerabilities are much lower today than compared to other major episodes of escalating violence.”
The country is protected by its strong currency reserves, reduced dependence on inflows of foreign currency and robust underlying growth. The rebound in the value of the shekel means that when the conflict eases the Bank of Israel has scope to reduce interest rates.
Past prudence in managing Israel’s economy mean that stability is not threatened. A rapid recovery of lost wartime output — once the guns are silenced — is eminently possible.
Alex Brummer is City Editor of the Daily Mail. His most recent book The Great British Reboot is published by Yale University Press
