As 2023 draws to a close, the Israeli economy faces the end of a challenging year with anticipation of greater challenges ahead, as the ongoing war against Hamas and regional instability continue to threaten economic stability.
Since early 2023, Israel has been embroiled in an unprecedented political crisis, sparking concerns about the potential ripple effects on its economy. Israelis were sharply divided on government policies regarding the future of the judicial system with massive anti-government demonstrations taking the country by storm.
Prior to the outbreak of war in October, the economy was already operating under significant uncertainty. Compounded by global slowdown and rampant inflation, this internal turmoil hindered the economy's recovery.
“Before the war, the forecast for growth was already down compared to 2022,” said Sergei Sumkin, a senior researcher at the Aaron Institute for Economic Policy at Reichman University. “The risk premium was on the rise, as did the interest rate, indicating a slowdown in the economy.”
Finance Ministry data indicates a gradual decline in the country's tax revenue income since the year's start. A report by Start-Up Nation Central, a nonprofit organization that monitors Israel’s high-tech ecosystem, shows more than half of the startup companies in the country have begun moving their funds outside of Israel, some of them with the intention to extract workers from the country as well.
While a reduction in foreign investment in the tech sector can also be attributed to the global economic climate, the Israeli sector had added vulnerability due to internal instability.
The unforeseen war has rendered the economy even more fragile. From a complete halt in tourism to global shipping challenges, there is not a single sector in the economy that has been sheltered from the shockwaves of the war. Once again, the Israeli economy faces a severe test.
“The war was a huge breaking point for the economy which is still ongoing,” said Professor Benjamin Bental, principal researcher and Economics Policy Program chair at the Taub Center for Social Policy Studies. “There are tremendous consequences that we still cannot estimate the end of.”
For the current quarter, the last of 2023, Bental predicts a major drop in gross domestic product (GDP), estimating a decline of 4-5% compared to a growth of at least 3% in the same quarter last year.
“This is a significant blow to the economy,” he added.
The cost of the war so far is estimated by experts at approximately $30 billion. The staggering cost, which could very easily rise, especially if another front in northern Israel develops, leads to the question of how the government will fund the war effort.
“The cost of the fighting will be a substantial burden on the Israeli economy, resulting in a decrease in the quality of living of Israelis,” Bental told The Media Line.
Many sectors, from hospitality to agriculture and high-tech have been affected by a workforce shortage caused by the war.
A lot of businesses have suspended operations, and others have been forced to shut down completely. Many workers are in reserve duty and others have been evacuated from their homes in southern and northern Israel, distancing them from their workplaces.
The tourism industry has been especially hard hit, coming to a complete standstill. Most flights to and from Israel have been canceled, hotels are mainly occupied by over 100,000 Israeli people who have been evacuated. The sector sees no end in sight as the war continues.
“The cost of war is currently being carried by a rise in debt and a rise in the ratio between the GDP and the debt,” Sumkin explained.
The idea of raising taxes has been afloat, to the tune of much criticism both from the public and from politicians.“The economy is in a recession,” Sumkin told The Media Line. “Raising taxes is not something to think about before 2025, before stabilizing the economy.”
War had immense effect on job market
The war has had an immense effect on the job market in the country. According to Michal Dan-Harel, managing director of Manpower Israel, it will take at least six more months for the market to stabilize, assuming the war continues at its current intensity and does not escalate further or to other arenas.
Approximately 300,000 people were called up for military service at the outbreak of the war, half of them estimated to be part of the workforce. Those evacuated from their homes are also facing challenges in finding new jobs.
“Many employers don’t want to hire someone for what could be temporary employment,” Dan-Harel told The Media Line. “For manufacturing companies and plants that have been closed, their clients have found alternatives, making their future even more uncertain even when the war will end.”
Dan-Harel says that as the war lingers, nearing three months already, the economy has entered an “emergency routine” phase with things very gradually recuperating. For job seekers, this could be very tough.
“There are a lot of people looking for work and as a result of the war, there are much fewer job openings,” she said. “It takes longer to find a job and often requires a lot of compromise.”
The national annual budget for 2024 had been approved before the war. At the onset of the fighting, there were calls to open it and redistribute the resources. Its approval was subject to public controversy, on the heels of a very heated debate on the future of Israel, the opponents of the government were critical of government priorities as reflected in the budget.
“The government needs to be very responsible in how it uses its budget, how it distributes the money which now needs to be used for the war effort and stabilizing the economy and not for other needs,” said Sumkin.
The current coalition, headed by Prime Minister Benjamin Netanyahu, has so far resisted calls to alter the budget. Leading a far-right government, Netanyahu allowed for the allocation of funds to many sectorial needs of the right-wing and ultra-orthodox Jews. Several ministries, many of them completely redundant, were created in order to appease coalition partners.
“The budget needs to be revised and changed according to new priorities,” Sumkin said. “The budget needs to serve the war economy and stabilize it. This means closing unnecessary ministries and investing that money in growth, any money that is not geared towards that will harm the economy.”
According to the Israel Innovation Authority, the high-tech sector makes up almost 20% of Israel’s GDP. It has been a critical engine in the country’s economic growth in recent years. After a tough year of political instability, the war dealt another blow to the sector.
“We are already seeing a drastic decrease in the investments in high-tech companies, especially start-up ones,” said Sumkin. “This will lead to a reduction in hiring new employees. This process will result in the high-tech sector going into survival mode. If the state will not invest in research and development, the high-tech sector will be hard-hit, and this will have a detrimental effect on the ability of the whole economy to recover in the coming years.”
The government has its hands full with managing a war and a war economy.
“In the last years, Israel has enjoyed growth in GDP per capita. But after 2023, and what looks to be an even worse 2024, there will be a greater gap between Israel and the world which will continue to progress,” said Bental. “This will be a serious blow to an economy that was forecasted to grow in the coming years and solidify its position amongst rich countries. Right now, the direction has changed.”