Can Israel's economy withstand the current conflict?

Following evacuation from their homes on the border with the Gaza Strip, tens of thousands of Israelis are now staying in other parts of the country. Many who live along the northern border with Lebanon have also moved to safety. The total number of Israelis who have evacuated is estimated between 200,000 and 250,000. Additionally around 360,000 reservists have also so far been called up to the military.

Businesses have shut down in the zones that locals have evacuated from. What's more, since the Hamas attack on October 7 that killed 1,200 Israelis and foreigners and sparked the current conflict, tourism has ceased, cutting off one of the country's main sources of income. Hardly any foreign airlines still fly to Israel, Dan Ben-David, a professor and the head of the Shoresh Institution for Socioeconomic Research based at Tel Aviv University, told DW.

So far this rupture to economic life remains under control, he said. "But the impact depends on a whole range of variables. How long will the war last? Will Hezbollah intervene in the war? And if the war continues, how long will we need the reservists?"

If 360,000 people are in the army, then many spouses will have to forgo working in order to care for children, especially since many schools have been closed, Ben-David added.

'All our best eggs in one basket'

The war will also put major strain on another key sector, the tech industry. ”In Israel, only around 10% of employees work in the high-tech sector but they are responsible for over 50% of our exports," Ben-David said.

Most of these workers are relatively young and now serving in the military in Gaza or on the Lebanese border. The problem is not with percentages, where one might think that the gross domestic product (GDP) would drop by 20% if 20% of the workforce is drafted into the army, he explained. Instead, it centers on who exactly these recruits are: They are young, well educated, and highly productive.

By contrast, those who haven't been conscripted tend to have lower productivity, the researcher said. 

Gilad Malach, director of the ultra-Orthodox society program at the Israel Democracy Institute, estimates that almost half of all ultra-Orthodox men do not work. They and their often large families receive billions in state subsidies that the ultra-Orthodox coalition partners of  Prime Minister Benjamin Netanyahu would like to increase even further.

"Because we are so dependent on the high-tech industry, which is both good and bad, we have put all our best eggs in one basket," Ben-David argued, adding that a setback in this area impacts the entire country.

Tech industry as economic buffer

In the past, the tech industry has buffered the worst effects of economic crises, helping Israel emerge from recessions more quickly and avoid economic downturns that hurt other parts of the world.

After the second intifada — a period of violence and Palestinian uprising between September 2000 to February 2005 — the country's economy was in bad shape. "But the economic upturn that followed was phenomenal because tech was the main driver of growth,” Ben-David said. "Then came the Great Recession of 2008 and 2009, the worst recession in the Western world since the Great Depression of the 1930s. But Israel didn't even feel it because the high-tech industry around the world barely felt it. And because tech is very important here, we didn't notice anything.”

Israel experienced the COVID-19 pandemic in a similar way. While every country was affected by the pandemic, with millions barely working for some time, Israel recovered more quickly than most thanks to the strength of its tech industry.

Ben-David concludes that if the war with Hamas does not last too long and Hezbollah does not enter the war, then the Israeli economy could quickly regain its former strength.

Protests hindered investment

But this will depend on whether Netanyahu and his supporters remain in power. Before the war began, mass protests against his judicial reforms had kept the country on tenterhooks.

"Although the economy has not come to a complete standstill, investment has fallen significantly,” Ben-David said. "Investment in the high-tech sector declined, share prices fell. Many Israelis withdrew their money from the country and the shekel was devalued considerably.”

The real question is what happens after the war, the economist said. "If we can kick Netanyahu and his cronies out and restore order, the high-tech sector should probably remain intact. But what happens if not?"

More money would likely flow out of Israel as tech companies turn their backs on the country, Ben-David said, citing a trend that had already emerged among startups before the current conflict. In the first nine months of 2023, most Israeli startups were founded in the US and elsewhere, rather than in Israel, which means a loss in tax revenue, he added.

Brain drain underway

During the mass protests against judicial reforms, it became clear that a number of prominent tech entrepreneurs disagreed with Netanyahu's politics. In fact, many who led and even supported the anti-government demonstrations financially came from the tech sector, such as entrepreneurs Moshe Radman and Ami Dror.

"The unusual thing was that in the past these tech people would never have gotten involved in anything to do with politics. They were simply too busy developing ideas and making money,” Ben-David said. ”But when they realized that the future of the country was at stake, they acted.”

If Netanyahu stays in power, important tech industry figures, along with scientists and doctors, could also consider leaving Israel, the economist said.

For example, another central figure in the anti-government protests was leading physicist Shikma Bressler, a professor at the Weizmann Institute of Science in Rehovot, central Israel. 

Ben-David believes the danger of an exodus by academics like Bressler and other professionals was already brewing before October 7. In August and September, there was a sharp increase in Israeli doctors applying to the Ministry of Health for official certificates confirming their expertise and work records — the first step in applying to work abroad.

An enormous financial burden

According to the Bloomberg media outlet, the war is costing Israel around $260 million (Є238 million) a day. In October alone, Israel's budget deficit soared sevenfold. By the end of that month the national currency, the shekel, fell to an 11-year low against the dollar, though it has since stabilized following interventions by the Israeli central bank. However the Ministry of Finance in Jerusalem has announced it will increase government borrowing by a further 75 percent in November.

In a column on Friday that was critical of Jerusalem’s proposed policies to address the economic strain of the war, Bloomberg columnist Marc Champion summed up the difficult economic situation as follows: ”Israel is a country at war, with its expenditures exploding, revenue reduced and borrowing costs on the rise.”

This article was originally written in German.