Tel Aviv restaurants are full. High-tech exports remain strong. The shekel is holding up. In some ways, the Israeli economy seems unscathed by the war in Gaza. But the financial burden is there, and the longer the conflict continues, the worse it will get.
Prime Minister Benjamin Netanyahu has resisted diplomatic pressure to bring about a quick end to this bitter war. Will it ultimately be economic rather than diplomatic power that will sway him?
Last week I spoke with Naftali Bennett, Netanyahu’s prime minister for 2021 and 2022, and Avi Simhon, head of Netanyahu’s National Economic Council. Both were optimistic that the war will soon end and that Israel will emerge strong. Bennett said people in Israel’s tech industry, with whom he had been talking recently about emigration, have stepped up in creative ways to help soldiers, victims of Hamas, and those displaced from their homes near the Gaza-Lebanon border. “The war has made people idealistic,” he said. “It’s not going to be the same.”
But I also spoke to economists who are far more worried. “We have proven time and time again that we can absorb shocks,” Manuel Treitenberg, professor emeritus of economics at Tel Aviv University, told me. “The big question is what the outlook is going to be. If this is an open-ended conflict with a lot of uncertainty, that will be damaging.”
The longer the war continues, the more Israeli companies will come under pressure from boycotts and other measures that may not be lifted immediately after the conflict ends.
The growing patriotism among techies is unlikely to last, Yitzhak Raz, an economist at the Hebrew University of Jerusalem, told me. “Many Israelis, especially the younger and more educated ones, are looking to the future, but they don’t see a bright future,” he said. “The war has made it worse.”
Israeli President Isaac Herzog said at an Israel Democracy Institute conference last month that “it is time to address” the war’s economic impacts, including “the rebuilding of communities in the north and south, the removal of reservists from the workforce, current and future skyrocketing and necessary security costs, looming threats to investments in Israel, and changes in international trade as a result of the war.”
Economic production has contracted after Hamas massacred about 1,200 people and kidnapped 253 in the fourth quarter of 2023, and Israel invaded Gaza with the goal of eradicating Hamas. The government projects a budget deficit of more than 6% of gross domestic product in 2024. An influx of foreign tourists is far off, and the construction sector has stagnated due to a labor shortage, as Palestinian construction workers from the West Bank are banned from entering the country. High-tech companies have had to grapple with the challenge of calling their employees into the military as reservists. Moody’s Investors Service downgraded the country’s credit rating in February.
Of course, there is no comparison between the situation in Israel and that in Gaza, where more than 30,000 people (many of them non-combatants) have been killed, thousands of buildings have collapsed, and there is the threat of starvation. According to the Palestinian Central Bureau of Statistics, Gaza’s economic output fell by more than 80% in the fourth quarter of 2023 compared to the previous year.
Output in the Israeli economy recovered in the first quarter of this year, and the vital technology sector is being buoyed by continued strong global demand for technology products. Last week, German software company SAP announced it would acquire Tel Aviv-based workflow automation company WalkMe for around $1.5 billion.
Some in the Israeli government remain optimistic that the economic challenges of the war remain manageable. Israel’s debt-to-GDP ratio is only about two-thirds the developed world average, according to the Organization for Economic Cooperation and Development, so this year’s projected budget deficit is tolerable to investors. By Israel’s method of measurement, the debt ratio was 60% before the war and is on track to reach a still-modest 66% or 67% by the end of this year, Simhon, an adviser to Prime Minister Netanyahu, told me. The shekel fell to below 25 cents against the dollar after the Oct. 7 Hamas attack but has since recovered to around 27 cents.
“We believe the worst is yet to come,” Simhon told me. “The war will wind down in the next few months.” As the war winds down, Simhon said, the debt-to-GDP ratio is likely to stabilize in 2025 and decline thereafter. That’s why he’s advising Netanyahu that tax hikes are unnecessary.
Outside the government, there is little optimism. Mr. Trajenberg thinks raising taxes is wise, not so much because revenue is urgently needed, but to reassure the world that Israel is determined to curb its budget deficit, which it has not always done. The 1973 Yom Kippur war led to a decade of slow growth, bank failures, rising government spending and, ultimately, a surge in inflation that reached 450 percent annually in 1985.
Fears of a repeat of 1985 appear to be permeating the bond market: Yields on 10-year Israeli government bonds recently hit their highest levels in 13 years, reflecting investor demand for more compensation for risk.
Adding to the uncertainty, Gaza is not Israel’s only front line. Hezbollah continues to launch rocket attacks and exploding drones from Lebanon. Last week, Prime Minister Netanyahu threatened a “very violent” military response. Hezbollah is better armed than Hamas, and an all-out war would be a big problem, first in terms of loss of life, then in the destruction of homes and factories, internal displacement and the disruption of business as usual.
Even if one war ends and the other is averted, Israel faces long-term challenges, including the threat of its best and brightest emigrating to find peace and quiet or to avoid a permanent boycott of Israeli businesses.
Israel also needs to attract more of its ultra-Orthodox Jewish population, which is growing rapidly because of a high birth rate but has little secular education and many are unemployed. Ultra-Orthodox Jewish men are under pressure to join the army and get jobs.
Last month, the recently formed Economist Forum published an open letter warning that unless the ultra-Orthodox problem is addressed, Israel risks falling into a “spiral of collapse” as more and more secularists abandon the country. Raz, the Hebrew University economist, is a member of the forum, which is made up mainly of Israeli economics professors and former government officials. I also interviewed Itai Ater, president of the Economist Forum, an associate professor at Tel Aviv University and a senior fellow at the Israel Democracy Institute. Ater said the capital, Jerusalem, has become a poor city because its residents lean toward the ultra-Orthodox, despite an infusion of government aid. “If we continue down the same path, the same thing will happen to Israel,” he said.
The optimistic view is that Israelis are still supporting each other as they did before. “We’ve seen a change in people’s mood,” Avi Hasson, a former chief scientist at Israel’s Ministry of Economy and Industry who now runs Startup Nation Central, told me. “Last summer I would have said I was worried. Founders were openly talking about relocating or relocating their operations from Israel. What we’ve been hearing since then is: ‘We’re staying, we’re fighting, we’re solving the problems.'”
Bennett said ultra-Orthodox Jews are a resource for the Israeli economy as they join the military and in the workforce, and he expects that to continue in the near future. Arab Israelis, including women, and Jews who immigrate to Israel from abroad will also add to the workforce, he said.
During a visit to New York, Bennett told me the near-term outlook was “volatile,” but “longer-term, our fundamentals are good. We will come out of this.”
These are dark days for Israel, so it’s good to have actionable optimists. But the country also needs skeptical realists. In times of war, hope is not a plan.
Other: Lithium from geothermal wells
Everyone loves the chance to kill two birds with one stone, or get two things for the price of one. Last year, the Department of Energy announced grants for projects to extract lithium (for car batteries) from geothermal brines (which come to the surface during green electricity generation). Last week, billionaire Warren Buffett jumped on the opportunity to kill two birds with one stone through a joint venture with two companies in his portfolio: Occidental Petroleum, a quarter owned by Buffett’s Berkshire Hathaway, and the renewable energy division of Berkshire Hathaway Energy. BHE Renewables operates 10 geothermal plants in California’s Imperial Valley.
Quote of the Day
“He who kills a sow in her breeding destroys all her offspring to a thousand generations. He who kills a crown destroys all that it may have produced, even if it be ten pounds.”
— Benjamin Franklin, “Advice to a Young Merchant” (1748)
