Has the war on Gaza hurt Israel’s economy?

Israel’s war on Gaza, now well into its fourth month, has taken a toll on its own economy with many industries pausing business even as a few continue to get new investments.

Since October, Israel’s government has subsidised the salaries of reportedly 360,000 mobilised reservists deployed to Gaza – many of whom are high-tech industry workers in finance, artificial intelligence, pharmaceuticals and agriculture.

In November, the Bank of Israel put the war’s “gross effects” on Israel at 198 billion shekels ($53bn) and pared back its estimates for economic growth to 2 percent per year for 2023 and 2024, down from 2.3 percent and 2.8 percent.

In December, Israel’s Finance Ministry said that the war will likely cost Israel approximately $13.8bn this year if its high-intensity phase concludes during the first quarter of 2024.

In the midst of that, experts are watching to see how business is doing on the ground.

One of the industries that have continued to do well is the high-tech sector, its fastest-growing area for several years, which today accounts for close to 20 percent of the country’s gross domestic product (GDP) and 14 percent of jobs.

Since the Israeli start-up scene exploded in the 1990s, Israel has established itself as the largest tech centre in the world, second only to Silicon Valley. More than 500 multinational corporations – from Google to Apple, IBM to Meta, and Microsoft to Intel Corp – operate in Israel.

And while there are concerns if companies would continue investing in a nation at war, for the moment at least, there’s no evidence to say that’s a real threat.

Ron Miasnik is an investor for Bain Capital Ventures who co-organised the Israel Tech Mission with David Siegel, the CEO of Meetup.com.

“We are longtime investors in the Israeli startup ecosystem, and have made it a priority to visit the region and meet with teams there to continue to support stability and economic prosperity in the area,” Miasnik told media. “In the long term, we believe in the resilience of the Israeli startup ecosystem and are committed to not only continuing but deepening our focus on the area,” he added.

Hillel Fuld, a tech columnist and startup adviser based in Beit Shemesh, Israel, pointed out that in December, US chipmaker Intel Corp confirmed its plans to build a $25bn chipmaking factory in southern Israel – a development hailed by Netanyahu as the “largest investment ever” in Israeli history. With a $3.2bn grant from the Israeli government, Intel’s planned investment is a big boost to Israel’s tech sector amid this war.

In the final quarter of last year, Israeli startups managed to raise $1.5bn and “out of those deals, high-risk ‘seed’ funding was $220m in 31 rounds”, Fuld said.

Palo Alto Networks, a Santa Clara, California-headquartered multinational cybersecurity company founded by American-Israeli entrepreneur Nir Zuk, has a history of acquisitions in Israel. On October 29, it acquired Dig Security for roughly $300m, then it acquired Talon Cyber Security for $615m.

Show of support

But the picture is slightly mixed, said Benjamin Bental, a principal researcher and economics policy programme chair at the Jerusalem-based Taub Center for Social Policy Studies. “When one looks at the number of players, one sees a decline. When one looks at the sums invested, one sees basically stability, meaning that those who stay invest more,” he said.

Israeli officials face the challenge of needing to restore confidence and a sense of security – which will not prove easy – to boost investments.

Perhaps the sector of the Israeli economy that has suffered the most amid this war is tourism which accounted for 2.6 percent of GDP before the pandemic in 2019, before falling to 1.1 percent in 2021. Both foreign and domestic tourism in Israel have flatlined since the start of the war.

Across Israel, restaurants and stores remain empty. Soon after Hamas’s incursion into southern Israel and the eruption of the war on Gaza, a long list of airlines cancelled or suspended the majority of their flights to Tel Aviv, and many tourists cancelled their plans to visit Israel.

Nonetheless, some major airlines such as Lufthansa and some of its subsidiaries, including Swiss International Air Lines and Austrian Airlines, resumed their flights to Israel earlier this month.

Prior to Operation Al Aqsa Flood, visitors to Israel numbered above 300,000 each month. In November, that figure reportedly sank to 39,000.

“War is not only tragic, it’s also expensive. The impact on tourism, for example, is a very real one and there is no ignoring it,” Fuld told media.

Construction, accounting for 14 percent of Israel’s GDP, has taken a huge hit since this war began. Across Israel, construction projects have been paused since October and Israel indefinitely froze worker permits for Palestinians who make up 65-70 percent of the workforce in Israel’s construction sector.

Consequently, industry in Israel and the West Bank’s economy have taken a huge hit. Of the 110,000 Palestinians who had permits to work either in Israel-proper or on illegal settlements in the West Bank and East Jerusalem, most were working in construction.

The gap has not been filled by Israeli workers, given how the reservists have been called to fight in the war, nor by foreign workers who have, in large numbers, fled Israel amid this conflict.

In November, the Israel Builders Association said that Israel’s construction industry was operating at roughly 15 percent of its pre-October 7 capacity. A month later 8,000-10,000 Palestinian workers were permitted to resume work on Israeli settlements in the West Bank – a decision the government made after it came under significant pressure from business and factory owners hit hard by “supply shocks”.

But that’s far from sufficient and to fill the gap, Israel plans to bring in approximately 70,000 construction workers from China, India, Moldova and Sri Lanka.