Israel Risks Economic Collapse After 11 Months of Gaza War

As the conflict in Gaza stretches into its 11th month, Israel is grappling with a serious economic downturn. A report from “The Conversation” highlights that Israel is experiencing the slowest economic growth compared to other affluent nations within the Organization for Economic Cooperation and Development (OECD).

Recent data indicates that Israel’s Gross Domestic Product (GDP) shrank by 4.1% in the aftermath of Hamas’ major assault on October 7, 2023. The economic decline continued into 2024, with decreases of 1.1% and 1.4% recorded in the first two quarters.

The situation escalated after a nationwide strike on September 1, which brought significant disruption to Israel’s economy. Rising public dissatisfaction regarding the government’s approach to the war is becoming increasingly evident.

While Israel’s economic challenges are minor compared to the widespread destruction of Gaza’s economy, the ongoing conflict is undeniably exerting pressure on Israeli finances, corporate investments, and consumer sentiment, according to the report.

Prior to the war, Israel’s economy was flourishing, propelled by its thriving tech sector. In 2021, the GDP per capita witnessed a 6.8% increase, followed by a 4.8% growth in 2022, significantly outpacing the majority of Western nations.

Yet, the war has profoundly changed this dynamic. In July 2024, the Bank of Israel lowered its growth forecast for the year to 1.5%, down from an earlier prediction of 2.8%.

With no resolution to the conflict in sight and escalating tensions on the Lebanese border involving Hezbollah, the Bank of Israel anticipates that the financial toll of the war could reach $67 billion by 2025.

Despite the U.S. contributing $14.5 billion in military assistance, it is reported that Israel’s financial reserves might struggle to accommodate these escalating costs.

Israel is now confronted with tough decisions regarding resource allocation, which may necessitate budget cuts in specific areas or increased borrowing. More debt could lead to higher loan repayments and enhanced future servicing expenditures.

This mounting financial burden raises concerns about Israel’s capability to maintain its current military strategies. The ongoing operations in Gaza, aimed at dismantling Hamas, demand substantial ground forces, advanced weapons, and continuous logistical support, all of which incur significant costs.

In addition to the overall economic decline, particular industries in Israel are facing severe repercussions from the war. The construction sector, for example, experienced a one-third drop in activity during the first couple of months of the conflict, while agricultural output decreased by approximately 25% in specific regions.

To tackle the labor shortages, the Israeli government has introduced workers from countries such as India and Sri Lanka. However, many critical roles remain unfilled.

Estimates suggest that around 60,000 Israeli businesses could close in 2024 due to labor shortages, interruptions in supply chains, and waning business confidence. Numerous companies have also postponed plans for new projects.

Although tourism is not a central pillar of Israel’s economy, this sector has also been adversely affected, with a significant drop in tourist numbers since the outbreak of war, putting around 10% of hotels in jeopardy of closing.

While Israel’s economy has been battered by the ongoing conflict, the impact on the Palestinian economy, especially in Gaza, has been far more devastating. Recovery may take years, as outlined in “The Conversation.”

The repercussions of the war extend well beyond Israel and Palestine. In April, the International Monetary Fund (IMF) projected a sluggish growth rate of merely 2.6% for the Middle East in 2024, linking this forecast to the ongoing uncertainty stemming from the Gaza conflict and the potential for a broader regional war.