Despite the strain of the war with Hamas, Israel’s economy is showing signs of returning to normality.
Official economic data for the first three months of 2024 has not yet been released by the government, but recent labor market data from the Central Bureau of Statistics and credit card transaction data from the Bank of Israel show that the country’s economy is recovering from the big blow. It suggests that it is happening. The October 7th terrorist attack and the war that followed.
Israel’s economy suffered a significant contraction in the final quarter of 2023 following the terrorist attacks. Its economy shrank by 5.2% compared to the previous quarter. Many were related to the workforce disruption that occurred when approximately 300,000 reservists were called into the country’s armed forces.
But Benjamin Bental, an economics professor at the University of Haifa, says the labor market is finally starting to recover after so many workers and small business owners suddenly left the economy.
“The labor market is stabilizing really quickly,” he told DW. “Although not yet at pre-war levels, the official unemployment rate is actually 1% lower than in September 2023.”
Labor conditions are improving as some reservists continue to return home, while strong credit card data suggests consumer optimism is returning from the Great Recession in late 2023. are doing.
However, Mr Bental said certain sectors, particularly construction, remained severely affected by the labor shortage. The main reason for this is that the industry relies heavily on Palestinian workers coming from the Israeli-occupied West Bank, who are currently unable to travel to work in Israel due to the security situation.
Israel’s construction sector is at a standstill due to labor shortagesImage: RONEN ZVULUN/REUTERS
Approximately 75,000 Palestinians once commuted daily from the West Bank to Israel for construction work. In their absence, housing construction decreased by 95% at the end of 2023, and building work almost completely stopped.
The sector has seen some recovery since Israel brought in thousands of workers from India, Sri Lanka and Uzbekistan to resume construction work, but the full picture will not be clear until first-quarter data is released.
israel budget deficit
The war has forced the Israeli government to significantly increase spending, not only on defense costs but also on reconstruction costs following Hamas attacks and the cost of rehousing tens of thousands of Israelis displaced in the country’s north and south. There was also a sudden increase.
Last month, Israel announced a revised national budget for 2024 of 584 billion shekels ($160 billion, 144 billion euros). The budget proposal was initially reported to set the budget deficit for 2024 at 6.6% of gross domestic product (GDP), up from the prewar level of 2.25%. However, Benjamin Bentall says it is already clear that this is a significant underestimate and that an 8% deficit is more realistic.
“Assuming the security situation does not deteriorate further, this seems more or less reasonable,” he said, referring to current tensions with Iran.
Government finances are clearly under pressure. It plans to raise taxes and raise around $60 billion (56 billion euros) in debt this year, but it insists it has the capacity.
Israeli wars and business
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“The fundamentals of the economy are there,” Treasury Comptroller-General Jari Rotenberg told the Financial Times ahead of the revised budget announcement. “If you look at high-tech, it’s there. If you look at infrastructure investment, it’s there. If you look at consumer spending, it’s there.”
Learning from past conflicts
Before the October 7 attack by Islamic militant group Hamas, Israel’s economy was in good shape. “The economy was doing extremely well,” Bentall said. “Inflation was falling and the overall financial situation was very well controlled.”
He noted that before the attacks, Israel was aiming for 3.5% growth in 2023, and despite the shock in the last quarter, it is still growing at 2% for the year.
He stressed that on the streets of cities such as Tel Aviv and Haifa, there are few traces of the war economy or a sense of scarcity and deprivation. But he cautioned that Israel’s experience of how past wars and security crises have affected the economy should guide the current leadership.
Bentall is concerned about excessive spending on defense, for example. During the 1973 Yom Kippur War, Israel dramatically increased its defense spending, reaching a “totally unsustainable” 30% of GDP. Coupled with the oil crisis and broader global economic crisis at the time, the conflict “led to a real economic disaster” for Israel. Israel had “very high inflation and basically no growth for almost a decade.”
The 1973 Yom Kippur War devastated Israel’s economy Image: Keystone Press Agency/ZUMAPRESS/picture Alliance
Bental said the second Palestinian intifada from 2000 to 2005 was more similar to the current conflict in that it involved civilians.
“During that particular event, you learn a little bit about the damage that is caused by a loss of trust and a loss of security among civilians,” he said. “And there are estimates that over the last few years, say three or four years, Israel’s GDP has declined by about 10 percent because of that very thing.”
Another example he cited was the 2006 conflict between Hezbollah and Lebanon. The conflict showed how quickly economies can recover once the fighting stops.
“We are basically talking about a situation in which the northern region of Israel did not function for a month,” he pointed out. “But when you look at the data and look for traces of it, you don’t find it. That’s really surprising. Once this was over, the economy recovered quickly.”
Bentall hopes that will happen once the current conflict ends, and recent signs of recovery suggest that’s just the way to go.
Editor: Uwe Hessler
