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Tuesday, May 21, 2024

Israel’s current war economy is effective, at least for now

Israel’s War Economy

Since the start of the conflict with Hamas, Israel’s economy has been hit hard. This three-week war has caused the country’s currency, the shekel, to plummet against the dollar. Businesses, from construction to dining, are closing their doors. The finance ministry has announced plans to increase defense spending and support those who have lost their jobs due to the conflict. Furthermore, the country’s central bank has lowered its growth forecast for the year from 3% to 2.3%.

The economic implications of war are critical to consider. Past skirmishes with Hamas have cost billions, just a fraction of the country’s GDP. Despite these costs, Israel’s economy has historically been able to bounce back, thanks to its high per-person income in the Middle East.

However, the scale of recent attacks is unprecedented, raising concerns about the economic impact. In 1973, the cost of the Yom Kippur War nearly led to financial collapse. Similarly, the Palestinian intifada of 2002 cost 3.8% of the GDP.

Israeli officials face three main challenges to prevent economic disaster. The first is employment. The mobilization of over 360,000 reservists has left an enormous void in the workforce, particularly in industries that rely on high-productivity workers. Meanwhile, labor shortages have been exacerbated by restrictions on Palestinian workers entering Israel due to unrest in the West Bank.

Another challenge is the slackening of private consumption. In the wake of the conflict, people are less likely to go out, leading to empty restaurants, shopping malls, and a sharp decline in tourism. The final challenge lies in the fiscal costs of the conflict, which has involved rescuing businesses, compensating reservists, and supporting entire communities forced to flee their homes.

Despite these challenges, Israel has historically managed to weather the economic storms caused by various conflicts. The country’s debt is modest compared to its wealth, and it has substantial foreign-exchange reserves. However, the longer the war continues, the greater the risks become.

The government must carefully manage the economic impact of the conflict. Travel restrictions, low consumer activity, and higher fiscal costs all reflect the toll the war is taking on Israel’s economy. Time is of the essence, and there are no easy solutions in sight.

The Middle East’s business and finance picture has been significantly shaped by this conflict. To gain a deeper understanding of the complex economic landscape, sign up for The Economist’s weekly newsletter. We provide expert analysis for those concerned about economics, finance, and market trends. We keep you informed so you can make smarter decisions for the future.

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