‘There is no work’: war with Hamas hits Israel’s economy

 Jeremy Welfeld, the owner of a brewery in Emek Hefer, Israel, and 14 restaurants across the country, has been severely affected by the recent war between Israel and Hamas. Prior to the conflict, his brewery produced 50,000 liters of beer per month, and his restaurants attracted thousands of customers daily. However, in the two weeks since the war began, Welfeld's businesses have come to a standstill. The brewery has ceased all production, and 12 out of its 14 restaurants have been forced to close. Even in the two remaining open restaurants, customer footfall has drastically decreased, with just five people showing up during lunch hour on Thursday. Welfeld is concerned about the future of his company, as he is unable to cover his overhead costs and fears that this crisis might be the final blow to his business.

The impact of the war extends beyond Welfeld's business. Throughout Israel, the conflict has paralyzed the economy, despite the country's history of resilience in the face of the prolonged conflict with the Palestinians. Streets are now half-empty, and companies are struggling to stay afloat. In response to the initial shock caused by Hamas's assault on October 7, many bars and restaurants had to close down, and numerous flights were canceled. Compounding the situation, a significant number of military reservists, approximately 360,000, have been called up, leaving remaining businesses understaffed. 

This ongoing conflict has dealt a heavy blow to the economy, exacerbating the already challenging situations faced by the occupied West Bank and Gaza, which have long suffered from poverty and high unemployment rates. The outlook for businesses and the overall economy remains uncertain as the war continues to unfold.  

The recent escalation of rocket fire from Palestinian militants in Gaza and growing tensions with Hizbollah militants in Lebanon have led to the evacuation of large areas along Israel's northern and southern borders. The war was triggered when Hamas, a Palestinian militant group, breached security barriers around Gaza and launched a multifaceted attack in southern Israel, resulting in the deaths of over 1,400 people according to Israeli officials. In response, Israel initiated airstrikes on Gaza and imposed a blockade, cutting off water, fuel, and power to the strip. This has raised concerns among UN officials about the potentially catastrophic humanitarian crisis unfolding in Gaza. Palestinian authorities report that the Israeli assault on Gaza, which is under Hamas control, has resulted in the deaths of 4,651 people. Additionally, there are fears that this conflict could escalate into a more widespread regional conflict.

These hostilities and regional tensions have had significant repercussions on Israeli markets. The blue-chip TA-35 index has experienced a 9% decline, and the shekel has fallen below 4 to the dollar as investors anticipate prolonged conflict and its economic impact. The cost of insuring Israeli government debt has surged. Guy Beit-Or, the chief economist at Psagot Investment House, warns that the economic fallout from this conflict could surpass that of Israel's month-long confrontation with Hizbollah in 2006, one of its major wars in recent history. He predicts that economic output could contract by 2% to 3% between the third and fourth quarters. The war has led to significant disruptions and cancellations, with people staying at home, and canceling holidays, parties, and events. Remote learning has been implemented in schools across Israel as children are unable to attend in-person classes. The Israeli economy is expected to face considerable challenges and endure a substantial toll as the conflict continues.  

The impact of the ongoing conflict in Israel is particularly severe in the services sector. Nina Mizrahi, a taxi driver from northern Israel, typically completes 20 to 40 journeys per day. However, in the past week, she has only been able to complete an average of one trip per day. The lack of work has left her uncertain about the future of small businesses like hers. 

Tourism, which usually experiences a surge during the October-December high season, has also been heavily affected. Ganit Peleg, the chair of the Israel Tour Guides Association, has reported numerous tour cancellations, some of which were scheduled up to two years in advance. There is a fear that a retaliatory invasion of Gaza could escalate into a broader regional conflict, causing even more cancellations and disruptions for the tourism industry. 

The collapse in business is reminiscent of what happened during the COVID-19 pandemic, which Israel had only recently recovered from. The economic pain is particularly evident in the areas near Gaza that faced the brunt of Hamas's assault. Sderot, a town of 30,000 people, now feels like a ghost town with more than 90% of its population evacuated. Row after row of closed shops and permanently blinking traffic lights at intersections illustrate the significant economic consequences of the conflict.  

As the true extent of the impact becomes clearer, there are increasing calls for government assistance. In response, Finance Minister Bezalel Smotrich unveiled a plan on Thursday to provide support to businesses that have experienced a decline in revenue, helping them cover their fixed costs. Additionally, financial aid will be offered to workers who are unable to commute to work. 

To further stabilize the situation, the central bank has taken action by announcing its intention to sell up to $30 billion of dollar reserves in order to strengthen the shekel.

Smotrich acknowledged that these aid plans could result in a higher government deficit, indicating that it may rise to 3.5% this year, compared to the previous target of 1.1%. Economists are also predicting a significant deficit for the following year.  

But despite the challenges, experts believe that Israel is in a better position to weather the current conflict compared to previous ones. With a lower debt-to-GDP ratio of about 60% and a substantial amount of foreign exchange reserves, estimated at $200 billion, the country has more financial stability. Rafi Gozlan, the chief economist at IBI Investment House, noted that this allows the government and the central bank to finance the increasing budget deficit that will result from the conflict. While there will certainly be damage to economic activity, the extent and duration of this impact will depend on the length and severity of the military operation.

Israel's history has shown resilience in its economy, even in the face of multiple wars. Erel Margalit, the founder of Jerusalem Venture Partners, highlighted that deals are still being made in the thriving tech sector, which has proven to be robust during challenging times. He emphasized that the high-tech industry was built amidst security challenges, indicating its ability to withstand current circumstances. Similarly, Jon Medved, the CEO of OurCrowd, expressed confidence in the economy's ability to bounce back, noting that risks exist everywhere and it's a matter of mitigating them.

Even amid the current turmoil, some workers in the high-tech sector have started returning to work. Ariel Cohen, the CEO of Navan, a corporate spending start-up, explained the importance of getting back to work and maintaining a sense of normality while acknowledging the complexities of the situation. On the other hand, Jeremy Welfeld remains cautious and is taking things day by day, hoping to reopen some of his restaurants with a skeleton crew in the near future. He acknowledges the complicated nature of the situation and anticipates that the conflict may persist for some time.  

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