Nearly all souvenir shops in Jerusalem’s Old City are closed. At Haifa’s flea market, despondent merchants are hawking their wares on empty streets. Airlines are canceling flights, businesses are failing and luxury hotels are half empty.
Nearly 11 months after the war with Hamas, Israel’s economy is struggling while the country’s leaders continue an offensive in Gaza that shows no sign of abating and threatens to spark a wider conflict.
Prime Minister Benjamin Netanyahu has tried to allay concerns by saying the economic damage is only temporary. But the bloodiest, most destructive war ever fought between Israel and Hamas has harmed thousands of small businesses and undermined international confidence in an economy once considered a vital source of entrepreneurship. Some leading economists say a ceasefire is the best way to contain the damage.
“The economy is under huge uncertainty at the moment, and this is related to the security situation — how long the war will last, what its intensity will be and whether there will be further escalation,” said Karnit Flugge, Israel’s former central bank chief who is now vice president for research at the Israel Democracy Institute, a Jerusalem think tank.
The war has taken an even heavier toll on Gaza’s already shattered economy, leaving 90% of the population displaced and most workers unemployed. All banks in the territory have closed. According to Palestinian health officials in the Hamas-run territory, more than 40,000 people have died in the fighting. Their count does not distinguish between civilians and combatants.
Fighting in Gaza and daily attacks by Hezbollah militants in Lebanon have also forced thousands of people to flee their homes on Israel’s northern and southern borders, causing unrest in Israel. massive damage,
The Israeli economy has recovered from previous shocks, including short wars with Hamas. But this long conflict has created a major strain, including the cost of reconstruction, compensation for the families of victims and reserve soldiers, and huge military spending.
The long duration of the fighting and the threat of further escalation with Iran and its Lebanese proxy Hezbollah have had a particularly hard impact on tourism. Although tourism is not a major driver of the economy, the loss has hurt thousands of workers and small businesses.
“The hardest thing is that we don’t know when the war will end,” said Daniel Jacob, an Israeli tour guide whose family depends on savings. “We have to end the war before the end of this year. If it’s another half a year, I don’t know when we’ll be able to end it.”
Jacob, 45, returned from six months of duty as a reserve soldier in April to find his business had collapsed. He was forced to shut down the tourism company he had spent two decades building up. His only income is a government grant that pays him half his pre-war salary every few months.
Meir Sabag, an antiques dealer in Haifa whose shop stood empty, said business was worse now than during the COVID-19 pandemic.
On a recent weekday, the formerly busy port of Haifa, a major hub for Israeli imports and exports where large container ships often docked, was quiet.
Many long-distance ships have stopped using Israeli ports as hubs because of threats posed to ships passing through Egypt’s Suez Canal by Yemen’s Houthi rebel group, according to a port official who spoke on condition of anonymity because he was sharing internal information.
He said shipping at Israeli ports in the first half of the year saw a 16% decline compared to the same period in 2023.
The war began on October 7, when Hamas militants killed about 1,200 people and took 250 hostage.
Efforts to broker a renewed US-led ceasefire appear to be failing, and Iran and Hezbollah have threatened to retaliate for the recent killing of top terrorist leaders, raising the risk of a wider regional war. Major airlines, including Delta, United and Lufthansa, have suspended flights in and out of Israel due to these fears.
Yaakov Sheinin, an Israeli economist with decades of experience in the field advising Israeli prime ministers and government ministries, said the total cost of the war could be as much as $120 billion, or 20% of the country’s gross domestic product, a broad measure of economic activity.
Of all 38 member countries of the Organization for Economic Cooperation and Development, Israel’s economy suffered the biggest slowdown from April to June, the organization reported Thursday. Israeli GDP was projected to grow 3% in 2024. The Bank of Israel is now forecasting growth of 1.5% — and that’s if the war ends this year.
Fitch downgraded Israel’s rating earlier this month from A-plus to A, following similar rating cuts by S&P and Moody’s. The rating cut could raise the government’s borrowing costs.
Fitch warned in its ratings note, “In our view, the conflict in Gaza could continue until 2025”, citing the potential for “significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment”.
In another worrying sign, the Finance Ministry said this month that the country’s deficit had risen to more than 8% of gross domestic product over the past 12 months, far higher than the 6.6% deficit-to-GDP ratio the ministry projected for 2024. In 2023, Israel’s budget deficit was about 4% of its gross domestic product.
The ratings downgrade and the deficit have increased pressure on the Israeli government to end the war and reduce the deficit – something that would require making unpopular decisions such as raising taxes or cutting spending.
But Netanyahu needs to keep his coalition afloat, and his hardline finance minister, Bezalel Smotrich, wants the war to continue until Hamas is wiped out.
Flugge, the former central bank chief, said the situation was untenable and that the coalition would have to cut spending, such as unpopular subsidies to ultra-Orthodox schools, which are seen as wasteful by the wider public.
“If the government doesn’t show that the gravity of the situation forces them to give up what they love, the public will have a hard time accepting it,” Flug said.
Smotrich said Israel’s economy “is strong” and vowed to pass a “responsible budget that will continue to support all of the war’s needs while maintaining the fiscal framework and fueling the growth engine.”
Sheinin said the unemployment rate fell below pre-war levels to 3.4% in July, compared with 3.6% in July last year. But when Israelis excluded from the labor market are taken into account, the figure rises to 4.8%, which would still be considered low in most countries.
Meanwhile, many small businesses have closed as their owners and employees have been called up for reserve military duty. Others are struggling amid the widespread recession.
Israeli business information company CofaceBDI reports that around 46,000 businesses have closed since the war began – 75% of them small businesses.
Even Jerusalem’s prestigious American Colony Hotel, a popular stop for politicians, diplomats and movie stars, has laid off staff and is considering pay cuts, said Jeremy Berkowitz, who represents the owners.
“We once considered closing for a few months, but of course that would have meant firing all the staff. That would have meant leaving the gardens we’ve developed over 120 years barren,” Berkowitz said.
Sheinin said the best way to get the economy back on track would be to end the war.
“But,” he warned. “If we remain stubborn and continue this war, we will not recover.”