There have been an unlimited number of commentaries on where to go from here after Oct. 7, most, nearly all, suggesting Israel must retaliate and reassess our relationship with Hamas. However, less has been written about the economic fallout from another war with the terrorist organization.
Follow Israel Hayom on Facebook, Twitter, and Instagram
Economic growth in 2023 as of July was trending to 3.11% on an annual basis. We can now assume that we won't reach that goal, depending on how long this war lasts.
Our previous war with Hamas, in 2014, lasted 50 days and caused a 0.3% drop in the economy. This war, however, is of a different magnitude, and will be far more costly because that war in 2014 was fought almost entirely in Gaza, whereas this war is being fought both at home and on the strip.
The government deficit
The target deficit when the budget was approved in May of this year was 1.1% of Gross Domestic Product, which is a measure of the size of the economy. Going into the war the deficit was already 1.3% of GDP and will now exceed that. Among the expenses that will expand the deficit is the mobilization of 300,000 reservists. Assuming an average monthly salary of 10,000 shekels and employer expenses of 25%, we're looking at a cost of NIS 3.75 billion a month. Add to that overtime pay for the police, military expenditures to fight the war, and repairs of physical damages by Hamas missiles. If the war continues and the economy slows down, we can add unemployment payments to the government's list of unexpected expenses.
Add to the above the reduction in state revenues that would come with an economic slowdown and the deficit simply widens even more. As it is, the deficit widened even before the war in part due to reduced government revenues as well as more expenditures than originally budgeted. As this war progresses, this trend will continue.
Tourism
Tourism is obviously going to take a hit. Most foreign airlines have reduced or halted flights to and from Israel. The drop in foreign tourists will impact the larger hotel chains that are preferred by foreign tourists, but we can also expect a drop in Israeli tourists to the smaller, boutique hotels they favor. The drop in tourists will also impact the nearby businesses that rely on tourists. This industry will see a drop in revenues and likely furloughs and layoffs. If the war lasts too long, some of the smaller businesses will simply close. All of this will combine to reduce state revenues, and may impact local authority revenues as well since they include hotel room taxes and property taxes, among others
Business failures
The longer the war lasts, the greater the impact on local businesses, as people remain home and avoid going out. As a result, local businesses will come under pressure to meet their expenses much like they did during the Covid-19 pandemic.
Stock market
The stock market initially showed sharp declines on Sunday, with 165 firms showing gains in their share prices but 551 showing declines and 233 holding steady. Last week, there were 356 gainers and 397 decliners, with 271 holding steady. Into the second week of the war, most TASE indices are down, most by 3% or more. While foreign investors may flee the local market, we can expect local investors to take advantage of any drops in share prices and market prices after the war should stabilize.
Exchange rate
We can expect a further decline of the shekel opposite the dollar and euro, which will raise import prices in the shekel market. We should therefore expect a degree of inflation as the war progresses. We can also expect more Bank of Israel intervention to support the shekel by selling dollars. We would also expect to see the BOI provide dollars to importers as the dollar supply drops due to the war.
Credit rating
A greater threat if the war lasts longer than a month is its impact on Israel's sovereign credit rating. As the economy slows and the deficit grows, Israel's credit rating could be downgraded, increasing the government's cost of servicing its debt.
Subscribe to Israel Hayom's daily newsletter and never miss our top stories!
The government should prepare for the slowdown that will come with an extended war. This will mean offering unemployment to those furloughed from work but not laid off, and provide funds to small businesses to keep them afloat. But this time, Israel will hopefully avoid making the same mistakes made during the Covid-19 pandemic, where the government handed out money too quickly, and then demanded some of it back.
We will get past this war as we will have others, but having learned from the previous conflicts we should prepare in advance for the obvious consequences.
Michael Humphries teaches marketing and management at the Jerusalem College of Technology and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.
