The Israeli economy is paying a high price for 12 months of war, although it is not completely destroyed, but continued hostilities risk causing a drastic increase in poverty, which is already very high in Israel, according to analysts.
“The Israeli economy may be solid, but it is struggling to cope with this war that has lasted too long. The country is sinking into a recession it has not experienced for twenty years,” predicts economist Jacques Bendelac, professor emeritus at the Hebrew University of Jerusalem.
Already weakened in 2023 by the political turbulence surrounding the highly controversial reform of the judicial system wanted by Prime Minister Benjamin Netanyahu and his far-right allies, the Israeli economy is far from having recovered from the shock of the war triggered on October 7 by the bloody attack by Hamas in Israel.
After plunging by 21% on an annual basis in the fourth quarter of 2023, Israeli GDP rebounded by 14.4% in the first three months of 2024, according to official data, but growth was sluggish in the second quarter (+0.7%).
The prolongation of Israel’s longest war since its creation in 1948-49 has prompted the three main credit rating agencies to downgrade the country’s debt rating, which nevertheless remains considered a solid borrower.
In justifying its decision, the Fitch agency noted in August that “the conflict in Gaza could last until 2025” and was concerned “about the risks that it will spread to other fronts”.
“Israel’s economy is strong,” Netanyahu responded, adding: “The downgrade is the result of a multi-front war that is being imposed on us. The rating will go up when we win.”
Construction sites at a standstill
The front between Israel and Hezbollah has thus intensified in recent days with explosions of Lebanese party broadcasting devices attributed to the Mossad and an escalation of violence on both sides of the border.
The country’s two main growth drivers remain high-tech and the arms industry, which account for nearly half of its wealth, but the other drivers of Israel’s economy, tourism, construction and agriculture, “are fading one after the other,” Bendelac explains.
With the war, Israel is facing a dire shortage of workers. According to the workers’ rights group Kav LaOved, with the entry ban imposed by the authorities on Palestinians from the occupied West Bank, only 8,000 of them remain employed in factories defined as essential.
Before the war, 100,000 work permits were issued, particularly in the construction sector (10% of GDP), agriculture and industry, to which were added around 80,000 to 100,000 illegal immigrants, according to some estimates.
In Tel Aviv, the country’s economic hub, construction sites have been at a standstill for months. Skyscrapers are waiting to be completed, as are major transport infrastructures.
Tourism has also plunged since October 7, with the war driving away both holidaymakers and pilgrims. From January to July, the country welcomed 500,000 tourists, more than four times fewer than in the same period last year, according to the tourism ministry.
Without clients, Hilik Wald, 47, gave up his freelance tour guide job in Jerusalem, which earned him an average of NIS 18,000 a month (about $6,800 Canadian). He now works part-time at a reception desk in a train station.
He received state aid for 174 days, but his entitlement to benefits has expired. “I hope the war will be over soon,” says the father of two young children.
New beneficiaries
As a result of the liberal revolution led by Mr. Netanyahu, the country has developed over the past twenty years “on credit consumption, and in crisis situations, many families can no longer repay their loans,” notes Mr. Bendelac.
But a high cost of living (as is the case in Israel) coupled with a slowing economy “inevitably translates into a widening of poverty,” he notes.
Before the war, more than a quarter of the Israeli population lived in poverty, according to Latet, Israel’s main NGO helping the poor.
New faces are lining up in the food distribution lines. In the parking lot of a shopping mall in Rishon LeZion, a coastal city in central Israel, south of the Tel Aviv metropolitan area, the NGO Pitchon-Lev (“Open Heart”) offers baskets of fruit, vegetables and meat twice a week.
Since the start of the war, “we have more than doubled our activities,” says Eli Cohen, founder of this NGO which says it supports nearly 200,000 families throughout the country.
Among the new beneficiaries, he meets “young people, families whose husbands are reservists, many people who were once donors and all those who were evacuated from their homes,” he says, referring to the tens of thousands of people evacuated in the north of the country where cross-border exchanges of fire between the army and Hezbollah have been almost daily since last October.
At the end of a war, “there is always a very strong recovery of the economy,” observes Mr. Bendelac, but “the longer this war lasts, the slower and more difficult the recovery will be.”