There’s been remarkably little coverage in the Western press about how well, or not, Israel’s economy is holding up under the impact of what is turning out to be a protracted conflict in Gaza and heightened hostilities on other fronts. John Helmer has provided some good accounts, and there was also a flurry of reporting after Israel reported what was widely seen as an unexpectedly bad GDP decline at the annualized rate of nearly 20% for its final quarter of 2023.
Israel should be reporting a first quarter GDP soon. Bear in mind that anything other than something of a bounceback, which seems vanishingly unlikely, will be very bad news. Even though the contraction is not likely to continue at the precipitous level of the fourth quarter. Or even if it has, the figures will be manipulated so it will not be reported so as to keep the Confidence Fairy out of the ICU. I have not idea how the official data mavens work in Israel, but the easiest way to fool with GDP reports in the US is by understating inflation, which for the purpose of estimating GDP is done through the GDP deflator.
Regardless, continued contraction from the already lower level at year end means that the loss of activity is at greater risk of becoming permanent. Note that this outcome is not an accident. Alastair Crooke has repeatedly pointed out that Israel and the US are both set up to wage short, air-firepower dominated wars. Iran, Lebanon, and Iran set out to thwart that by moving critical military infrastructure and decision-making well underground, too deep to be hit by air strikes. They have also set out to engage in longer war, which Israel would find hard to sustain, and in particular to control the escalation. Iran’s very carefully calibrated response to Israel’s attack on Iran’s embassy grounds in Damascus suggests they are actually good at that sort of thing. Iran made the point that it pulled its punches while not backing down and penetrating Israel’s layered defenses to strike the three targets. This is not what Israel and the US expected.
And that is before getting to the widely-reported asymmetry in costs, with Israel spending an estimated $1.2-$1.3 billion its defense, and the total expenditure across Israel and its allies as high as $3 billion. This compares to an estimated attack cost for Iran of $60 million.
Crooke has focused on the military calculus, of Israel not being set up to wage a long war. He’s mentioned, albeit not as often, Israel’s economic vulnerability. Here Iran and Hezbollah arguably have glass jaws too, since one of the big reasons for both of them to want to avoid a hotter war is Lebanon is in terrible economic shape, and Iran is only just now getting on a good footing after sanctions strangulation. But it seems, particularly due to the impact of the Houthis attacks on Israel’s trade, that Israel is suffering proportionately more from the conflict dragging on.
For instance, due to the intense focus on how Israel would respond to Iran’s drone and missile strikes, the fact that S&P downgraded Israel’s short and long term debt last Thursday, with a negative outlook, went largely under the radar. The ratings agency specifically cited the war being more protracted than initially expected as a big factor in its action. Via Fox Business:
“Under our baseline scenario, we still expect a wider regional conflict to be avoided, but the Israel-Hamas war and the confrontation with Hezbollah appear set to continue throughout 2024,” S&P Global Ratings wrote. “This is in contrast to our October 2023 expectation of military activity not lasting more than six months.”
Interestingly, the Independent woke up to the issue of the economic side of the Israel conflict in the last few days, with a story titled, Can Iran win an economic war of attrition against Israel? It reports:
The focus on so-called “kinetic” warfare is distracting us from the economic war that preceded the missile strikes between Iran and Israel this month, and is likely to intensify now….
Until last October, Israel seemed as invulnerable to economic warfare as it was to a military onslaught.
Only student groups in elite Western universities seemed enthusiastic for boycotts and disinvestment – and wouldn’t Columbia’s graduates grow up to be investment analysts recommending Israeli tech stocks?
But Israel has an achilles heel.
It is intellectual property rich, but natural resources poor, while Iran squanders its intellectual capital because it has oil and gas to waste on a covert war with Israel.
Israel’s problem today is less disinvestment – though there are straws in the wind in Belgium and Holland – than a good old-fashioned physical blockade. From attacks on Red Sea shipping by Iran’s Houthi allies in Yemen, to the Islamic Revolutionary Guards’ seizure of Israeli-owned shipping in the Persian Gulf, insurance and cargo delivery costs are hiking. Alternative road routes across Jordan to UAE ports are more expensive than sea routes for heavy goods – such as foodstuffs, machinery and vehicles…
Because of the Gaza campaign, as well as security demands in the West Bank and on the Lebanese and Syrian borders, huge numbers of workers have been called up into uniform in the IDF.
In the past, Israel won decisive victories quickly. Its first prime minister, David Ben-Gurion, warned that it could not survive prolonged wars of attrition…
Maybe Iran’s ability to survive decades of would-be economic strangulation is a sign that being more economically primitive (as well as repressive) makes a state less vulnerable to economic warfare.
Israeli society has been most cohesive in the face of external threats – until now. Benjamin Netanyahu’s Marmite effect on public opinion is re-emerging as the war drags on. Add economic and social costs to the human toll, and a new uncertainty haunts Israel.
I’ve included the digs on Iran as supposedly backwards (a look at its number of engineering graduates and its progress in building a domestic pharma industry disproves that) to show that an article with an obvious bias still has trouble finding happy outcomes for Israel.
As we’ll soon discuss, an anecdotal account at the BBC indicates conditions in Israel are continuing to deteriorate.
There is remarkably little on Twitter on the state of Israel’s economy, and what there is comes from parties with a vested interest. That does not mean it is not directionally correct, particularly since it echoes the Independent on the impact of the de facto blockade:
Ismail Haniyeh: Israel’s economy collapsed because of Yemen
Head of the Hamas political movement Ismail Haniyeh:
No one could have thought that a country like Yemen would have such a powerful impact and stop the transit flow in the Red Sea. This Yemeni action destroyed the… pic.twitter.com/msAFwfhqsP
— S p r i n t e r F a c t o r y (@Sprinterfactory) April 23, 2024
And the neighbors have taken a bruising too:
Israel’s war on Gaza has not only destroyed the Gaza Strip and the Palestinian economy, but its effects extended to impact the economies of the entire region. pic.twitter.com/UaFYR7xQJG
— Bin Ghalib (backup account) (@bgh2_ac3b) April 22, 2024
Even with this warmup, the BBC story comes off as grim. From We need a miracle’ – Israeli and Palestinian economies battered by war:
More than six months into the devastating Gaza war, its impact on the Israeli and Palestinian economies has been huge.
Nearly all economic activity in Gaza has been wiped out and the World Bank says the war has also hit Palestinian businesses in the occupied West Bank hard.
As Israelis mark the Jewish festival of Passover, the much-vaunted “start-up nation” is also trying to remain an attractive proposition for investors.
The cobbled streets of Jerusalem’s Old City are eerily quiet. There are none of the long queues to visit the holy sites – at least those that remain open….
Just 68,000 tourists arrived in Israel in February, according to the country’s Central Bureau of Statistics. That’s down massively from 319,100 visitors in the same month last year.
While it may be surprising that any visitors pass through Jerusalem at a time of such tension, many of those who do are religious pilgrims from across the globe who will have paid for their journeys well in advance.
Admittedly, the BBC reporting from Jerusalem will put the impact on tourism in focus. We cited reports earlier that put tourism narrowly defined at 2% to 3% of GDP and its broader impact at 5% to 6%. One has to wonder if those figures include travelers visiting and staying with relatives. The flights are presumably included, but their additional in-country spending is probably missed.
Back to the BBC:
It’s not just in Jerusalem’s Old City that they need a miracle.
Some 250km (150 miles) further north, on Israel’s volatile border with Lebanon, almost daily exchanges of fire with Hezbollah since the war in Gaza began have forced the Israeli army to close much of the area and 80,000 residents have been evacuated further south…
Agriculture in this part of Israel is another economic sector that has been hit hard…
Although they provide a living for thousands of people, agriculture and tourism account for relatively small parts of both the Israeli or Palestinian economies.
So what does the wider picture show?
The BBC describes how life in Tel Aviv seems unaffected, how nearly $2 billion was invested in startups in the first quarter, and no multinational has exited. Note that the latter does not mean there have been no cutbacks. Even with the shock and awe sanctions in Russia, most multinationals in Russia mothballed their operations, continuing to pay rent, in some cases continuing to pay what amounted to a skeleton staff, and other obligatory expenses. The Russian government forced them to fish or cut bait (forgive me for not rechecking the precise mechanism, but the government wanted the foreign businesses either to resume paying suppliers and staff at normal levels or sell out).
Back again to the text of the BBC account:
The economics professor [Elise Brezis] at Bar-Ilan University near Tel Aviv acknowledges that despite the last quarter’s GDP figures, Israel’s economy remains “remarkably resilient”.
“When it comes to tourism, yes, we have a reduction in exports. But we had also reduction in imports,” says Brezis. “So in fact, the balance of payments is still okay. That’s what is so problematic is that from the data, you don’t really feel that there is such a terrible situation in Israel.”
But Prof Brezis detects a wider malaise in Israeli society that isn’t reflected in economic data.
“Israel’s economy might be robust, but Israeli society is not robust right now. It’s like looking at a person and saying, ‘Wow, his salary is high,’ […] but in fact he’s depressed. And he’s thinking, ‘What will I do with my life?’ – That’s exactly Israel today.”
We’ll have a better idea of conditions in Israel when first quarter figures come out. But anything less than a strong bounce would not be good at all.