“You don’t understand the scale of the economic crisis”: the war in Gaza dealt Israel a terrible blow

The bloody events of October 7 and the subsequent brutal war in the Gaza Strip were a shock for Israel, which not only shocked society with the suddenness of the militant attack and the scale of human losses. The new armed conflict became a serious test for the Israeli economy.

A group of about 300 senior Israeli economists recently wrote in a letter to Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich calling for an immediate halt to all non-essential spending in the government budget and a re-prioritization of spending to cope with the looming economic crisis during the ongoing war with Israel. Hamas group.

“You do not understand the scale of the economic crisis facing the Israeli economy,” the veteran experts warned in their letter. “Continuing the current behavior harms Israel’s economy, undermines citizens’ trust in the government system and undermines the ability of the State of Israel to recover from the situation in which it finds itself.”

According to the Times of Israel, among the signatories of the letter are Professor Jacob Frenkel, former governor of the Bank of Israel; Roni Hezkiyahu, former bank governor of the Bank of Israel; Haim Shani, former Director General of the Ministry of Finance; Professor Leo Leiderman from Tel Aviv University; and 2021 Nobel Prize winner in economics Joshua Angrist of the Massachusetts Institute of Technology.

As Israel’s month-long war with Hamas continues, some 70 percent of Israeli technology firms and startups have faced and continue to face disruptions in their operations as some of their reservist employees were called up for military service. This is according to a survey conducted by the Israel Innovation Authority and the National Startup Policy Institute (SNPI). Many companies, from construction firms to restaurants, have closed, and other retailers have been forced to lay off their employees.

Naama Zedakihu, the owner of two restaurants in Modiin, a town between Jerusalem and Tel Aviv, has considered temporarily laying off her 70 employees because of the crisis. “I tried to open restaurants for the first time in two and a half weeks, but they are empty, so I will close early,” she said on October 24. “Supplies are not enough to support the business.”

From small restaurants to high-tech companies to a major gas field operated by Chevron, Israeli businesses are being rocked by the war against Hamas, Bloomberg reports.

Many have compared the estimated $520 billion damage to the economy to the Covid-19 pandemic, which left schools, offices and construction sites empty or open for only a few hours a day. Israel has mobilized a record 350,000 reservists ahead of its ground offensive on Gaza.

According to the Jerusalem Post, according to a recently published report by the Ministry of Labor, since the beginning of the ongoing conflict with Gaza, about 760 thousand people in Israel have been forced to leave their jobs due to military service, living on the Gaza periphery or caring for children, which amounts to approximately 18 % work force.

In addition, more than 46 thousand employees (representing approximately 1% of the workforce) were either laid off or furloughed, with 70% of them in the latter category.

In response to this significant labor shortage, Labor Minister Yoav Ben-Tzur announced that, among other measures, the ministry had “approved the recruitment of 5,000 foreign workers from around the world to address Israel’s agricultural crisis and help the sector continue to function.”

Military conscription and a partial economic freeze caused a sudden decline in activity and upended everything from banking to agriculture. These processes cost the government the equivalent of $2.5 billion a month, according to Mizrahi-Tefahot, Israel’s largest lender. The central bank has warned that the impact will worsen as the conflict continues.

The financial losses are already serious. Israeli stocks are the worst performers in the world since the fighting began. The main index in Tel Aviv fell 15% in dollar terms, equivalent to almost $25 billion.

The shekel has fallen to its lowest level since 2012 – despite the central bank announcing an unprecedented $45 billion package of measures to protect it – and is on course for its worst annual performance this century. The cost of hedging against further losses has risen sharply.

The letter from Israeli economists calls on Prime Minister Netanyahu and Finance Minister Smotrich to reconsider national spending priorities, since the expected costs of reconstruction after the war are estimated at tens of billions of shekels, if not more.

“The serious blow dealt to Israel requires a fundamental reordering of national priorities and a massive diversion of budgetary funds in order to cope with the damage caused by the war, provide relief to those affected and restore the economy,” the authors of the open letter wrote. “Cosmetic changes within the existing budget do not come close to meeting the required level of spending.”

The signatories called on the Israeli government to immediately halt budget spending that is not essential to the war effort and economic recovery, including the transfer of coalition funds estimated at 9 billion shekels ($2.2 billion).

The 2023-2024 state budget, adopted in May, included more than 13 billion shekels in spending, much of it for educational programs for the ultra-Orthodox community.

“At the same time, the 2024 budget must be opened and updated according to an order of priorities that reflects the needs of the entire economy in light of the war,” the Israeli economists urged in their letter.

The Bank of Israel recently cut its growth forecasts for 2023 and next year, warning of the negative consequences of the war on the local economy and financial markets. The central bank’s research department expects the economy to grow 2.3% in 2023 and 2.8% in 2024 as private consumption falls and work capacity is constrained, down from previous forecasts of 3% growth both this year and and next year.

The geographic scope and duration of the conflict will determine the extent of its long-term economic consequences. Prime Minister Benjamin Netanyahu warned of a “long and difficult” military campaign as Israel launched its invasion of Gaza.

The Knesset approved the Ministry of Finance’s plan to provide compensation to businesses that suffered collateral damage as a result of the conflict. The plan provides financial assistance based on the level of impact and business revenue. It covers a wide range of businesses, from businesses with an annual income of NIS 18,000 to NIS 400 million.

Eligibility for compensation is determined by the extent of the decline in revenue, with specific criteria for new businesses that began operations after September 2, 2022.