TEL AVIV — As the Gaza war approaches its fifth month, Israel finds itself beset by uncertainty militarily, politically, and economically. Analysts question when and to what extent it will be able to find its way out of this crisis.
Political instability, the prospect of social unrest, and the weakening of state institutions have increased Israel’s economic and political uncertainty and the consequent risks, casting doubt on Israel’s ability to recover from the entanglement, according to Manuel Trajtenberg, an economist who heads the Institute for National Security Studies.
It’s not just academics who are concerned. Uncertainty is permeating the offices of Israel’s vaunted high-tech industry, many of whose executives and employees were called up as army reservists to serve in Gaza.
The industry was already impacted by the worldwide high-tech slump and Prime Minister Benjamin Netanyahu’s divisive bid to overhaul Israel’s judiciary.
At A Glance Gaza War's Impact: The ongoing Gaza conflict, nearing five months, escalates uncertainty across military, political, and economic arenas in Israel. Political and Economic Risks: Increased political instability, potential social unrest, and weakened state institutions heighten Israel's economic and political risks. High-Tech Industry Concerns: Israel's crucial high-tech sector faces uncertainty, risking international investment due to the conflict and political decisions. International Perception and Investment: Israel's international reputation and attractiveness to investors are jeopardized by its handling of conflicts and internal policy decisions. Credit Rating Downgrade: Moody’s downgrades Israel's credit rating for the first time, citing increased political risk and weakened state institutions. Economic Strain and Recovery Doubts: Despite some economic strengths, the conflict and its aftermath cast doubt on the speed and ease of Israel's economic recovery. Social and Political Tensions: Netanyahu's policies, particularly those favoring ultraorthodox and ultranationalist partners, exacerbate social and political tensions amid the conflict.
The fear in Tel Aviv is that the Gaza war will now scare off many of the international investors who provide at least 80 percent of the funds for Israeli high-tech, and that they will invest instead in other countries that appear less risky.
“There is concern among Israeli entrepreneurs and funds,” says Sammy Peretz, senior columnist at Israel’s leading financial daily, The Marker.
He argues that Israel’s international brand has suffered from Israel’s failures to anticipate and rapidly thwart Hamas’s surprise attack on Oct. 7, which easily overcame a state-of-the-art border fence and was carried out with simple weaponry.
“My feeling is that Israel’s standing has been very much harmed over the last year,” Peretz said. “Until then, we were really the Startup Nation with a lot of investors and investment, seen as technologically at the forefront in many areas. I think what happened on Oct. 7 revealed Israel as lacking. This affects its brand as a technological state with a great deal of expertise and intelligence. If there’s a measure for brands, then Israel’s brand was harmed.”
Political instability, the prospect of social unrest, and the weakening of state institutions have increased Israel’s economic and political uncertainty and the consequent risks.
Manuel Trajtenberg, head of the Institute for National Security Studies
David Rosenberg, economics editor for Haaretz English, added that the economic impact of the fighting should not be seen as merely a short-term issue, as Netanyahu has tried to depict it: “Unlike our past wars, when things returned to normal, I don’t anticipate that this will happen in this case.”
He told TRENDS that if and when what the international community terms the “day after” the war comes, there will still be heightened security tensions compared to the past, more military spending, and call-ups of army reservists who are key to productivity in civilian life.
“All of that weighs on the economy,” said Rosenberg, the author of Israel’s Technology Economy: Origins and Impact.
Nor is there any certainty that fighting will remain confined to Gaza. Observers point to the possibility of exchanges across Israel’s northern front erupting into all-out war with Iranian-backed Hizbollah, which has a much more potent arsenal than Hamas, and it is feared this could mean a very costly confrontation.
There are also tensions in the West Bank as Palestinians there are embittered by the heavy toll from Israeli bombardments in Gaza, while having no political or economic horizon as government-backed Israeli settlers take over more Palestinian land.
Making matters even more volatile, much of the labor force is now unemployed due to an Israeli ban on the entry of day laborers. The continuation of the ban is opposed by Israel’s security establishment but backed by extremist politicians who wield broad powers in Netanyahu’s coalition.
There is concern among Israeli entrepreneurs and funds.
Sammy Peretz, senior columnist at The Marker
The possible lengthy continuation in power of Netanyahu does not help matters. While most Israelis face the prospect of tax hikes and cuts to education because of the costs of the war, Netanyahu is channeling more money to the constituencies of his ultraorthodox and ultranationalist coalition partners, thereby preserving the most right-wing government in Israeli history.
His backing of formalizing draft exemptions for the ultra-orthodox, most of whom do not work, at a time when others are fighting at the front, risking their lives and straining their families and livelihoods, threatens to heighten social tensions, Rosenberg says.
Tensions were high even before October 7, with many Israelis viewing Netanyahu’s plan for an overhaul of the judiciary as a bid to move the country toward authoritarianism.
“Everything he has done is tainted by political considerations and therefore suspect,” Rosenberg says. “His partners shouldn’t be in power at all, and definitely not when serious decisions have to be made without ideological blinders.”
Defenders of the government deny extraneous considerations and stress that it reflects the will of the majority as was expressed in the November 2022 elections.
Netanyahu, for his part, asserts that Israel is on the way to “total victory” and that his government will continue the war until this is achieved.
He denies responsibility for Israel’s unpreparedness for Hamas’s attack on southern Israel that ignited the war. Israel has killed about 29,000 Gazans, according to Hamas health authorities, who say the vast majority are children and women. Israel says some 1,200 people, mostly civilians, died during Hamas’s assault.
US intelligence estimates indicate that the military capability of Hamas has been degraded but is far from being eliminated, raising the prospect of more protracted fighting and persisting economic strain.
There is uncertainty about whether the international community will tolerate the implementation of Israeli plans to capture the southern Gaza city of Rafah, given the likely massive toll in Palestinian civilian casualties.
Unlike our past wars, when things returned to normal, I don’t anticipate that this will happen in this case.
David Rosenberg, economics editor for Haaretz English
Not only world leaders are looking at Israel with a more critical eye. The credit agency Moody’s, blaming the war and implicitly Netanyahu and his partners, recently assigned Israel a “negative outlook” and downgraded its credit rating for the first time ever, from A1 to A2.
In explaining this, Moody’s said in a statement that “the ongoing military conflict with Hamas, its aftermath, and wider consequences materially raise political risk for Israel as well as weakening its executive and legislative institutions and its fiscal strength for the foreseeable future.”
Soon after the Moody’s finding, there was more cause for concern when official statistics were released indicating that the economy had shrunk by nearly five percent during the last quarter of 2023. This is being attributed to factors including Israeli southern communities being shut down as a result of the Hamas attack, dropping consumer confidence for spending, and Israeli army reservists being called up.
Although important sectors of the economy have recently picked up, Israel’s construction industry remains largely paralyzed because of the lockout of West Bank Palestinians who normally form the backbone of its labor force.
Some economic figures say pessimism is not warranted. The A2 rating from Moody’s is still high, and Israel has notable economic strengths, including highly respected central bankers.
Zvi Eckstein, a leading economist and corporate figure, voiced faith in Israel’s economy in an interview with TRENDS. “Israel has proven it can come back economically over the last twenty years and even before,” he said.
Moody’s “was a bit tough in specifying a negative outlook,” said Eckstein, dean of the Tiomkin School of Economics at Israel’s Reichman University and a member of the board of directors of Alony-Hetz Properties and Investments Ltd, which trades on the Tel Aviv Stock Exchange.
The Israeli economy is very strong. It’s particularly strong in the high-tech sector.
Zvi Eckstein, a leading economist and corporate figure
“The interest rate will be higher. But the Israeli economy is very strong. It’s particularly strong in the high-tech sector. The research and development sectors continue to work well, with high-tech production in the last quarter not reduced almost at all,” Eckstein pointed out
“It’s an economy that is very resilient to shock, and the key question is how the war will end. If it ends by the summer with success in Gaza and the north in terms of providing security and stability, I think the economy could revitalize fairly soon. If it doesn’t end by then, it will take longer, but eventually, we will find a way to grow again,” added Eckstein.
However, Trajtenberg, head of the Institute for National Security Studies, wrote in a position paper that Moody’s designation is a “severe blow.”
“The lowering of the rating has very tangible consequences for all Israelis,” he concluded.