A depleted workforce, constant sirens warning of the threat of missiles, and a feeling of shock due to the unexpected attack - all contribute to the size of the cost to the Israeli economy as a result of the war with the Islamic Resistance Movement (Hamas) and is expected to be different from anything else the economy has been exposed to since Contracts.

The cranes that dot the Tel Aviv skyline stopped several days ago after the city closed construction sites. An industry report stated that these sites were reopened this week under stricter guidelines to ensure safety, but the cessation of activity in this sector alone is costing the economy an estimated 150 million shekels (about 37 million dollars) per day.

“This is not a blow to contractors or industrialists alone,” said Raul Sarojo, president of the Association of Builders of Israel. “It is a blow to every family in Israel.”

Israel was shaken on October 7 when the Palestinian resistance launched Operation “Al-Aqsa Flood,” and since that date Israel has responded by carrying out continuous raids on the Gaza Strip and mobilizing its forces in preparation for a ground attack.

Israel's roughly $500 billion economy - the most developed in the Middle East thanks to its inherent strengths in technology and tourism - was healthy for most of 2023. Growth was on track to reach 3% this year as unemployment fell.

But with a ground war in Gaza likely imminent and the war potentially turning into a regional conflict, Israelis are holed up and spending less on everything but food, while rating agencies have already warned that they may lower their assessment of Israel's creditworthiness.

A huge gap in the workforce

Hundreds of thousands of army reservists have been called up, causing a huge gap in the workforce and disrupting supply chains from seaports to retail stores, while retailers are furloughing employees, amid the decline in the value of the shekel.

The conflict also halted the movement of thousands of Palestinian workers from Gaza to Israel and reduced their flow from the occupied West Bank.

The escalators and walkways of Jerusalem's main shopping mall were empty during the first two weeks of the war, although customers slowly returned.

“There is a significant decrease in traffic,” said Nathaniel Shraga, manager of Columbia Sportswear. He added that some of his employees were called up for military service. Others feel very afraid to come to work.

Hotels are now half full of Israelis evacuated from the border areas, and the rest of the rooms are mostly empty.

Work is still continuing in factories, even those close to Gaza, but there is always a problem related to the insufficient number of truck drivers who carry out regular deliveries.

Credit card purchases fell 12% last week compared to the same period a year ago, with sharp declines in almost all sectors except for a significant rise in retail shopping.

The high-tech industry, which has boomed during the Covid pandemic, is facing difficulties. This industry usually represents 18% of Israel's GDP and half of total exports.

“Productivity drops dramatically because it's hard to focus on daily work when you have existential concerns,” said Barak Klein, CFO at fintech company Thetaray.

12 of the company's 80 employees residing in Israel were recruited into the reserve forces. Others - with children - remained at home, while the constant fear of missile launches remained.

Thettarai has set up a daycare center for employees who need to take their children with them, and has relied on its overseas offices to shoulder part of the workload.

Al-Aqsa flood losses to Israel's economy in numbers

An estimated 10 to 15 percent of the high-tech workforce has been called up to serve in the reserve forces, said Dror Ben, CEO of the state-funded Israel Innovation Authority.

“We are in contact with hundreds of technology companies, especially early-stage projects,” he added, explaining that many of them are in the middle of their financing cycle and are running out of money.

In order to provide assistance, the Innovation Authority established a fund worth 100 million shekels (about 25 million dollars) to help 100 technology startups weather the storm.

The Ministry of Economy established an operations room in times of war and issued an appeal for assistance. Its database has so far matched at least 8,550 people to distressed companies.

When a major supermarket chain's logistics center came under severe pressure, 38 people were sent in to fill the night shift.

Psychological crisis

The government promised "not to set limits" on spending on financing the war and compensating affected families and businesses, which means a larger budget deficit and more debt.

Past conflicts may not be a correct guide to the course of the economy. GDP fell by as much as 0.5% in the 34-day war with Lebanon's Hezbollah in 2006 as exports fell and manufacturing slowed, but the recovery that followed was rapid.

Officials say what is happening today is different.

Leo Lederman, chief economic advisor to Bank Hapoalim - one of the largest banks in Israel - said that there is a "psychological crisis" among the Israeli public and that its negative effects have already begun.

He added, "People will reduce consumer spending due to the uncertainty and atmosphere" prevailing.

Since consumer spending represents more than half of economic activity, the damage to the economy could be significant.

A senior official at the Israeli Ministry of Finance told Reuters, "Israel was able to recover significantly from all the recent hostilities... This event seems to be more exciting, although it is too early to confirm that."

On Monday, the Central Bank of Israel reduced its economic growth estimates for 2023 to 2.3%, down from 3%, and to 2.8%, down from 3% in 2024, assuming the war in Gaza is contained.

Bank Governor Amir Yaron - who currently opposes lowering interest rates - expects a recovery. He said, "We knew how to recover from difficult periods in the past and (we knew how to) return to prosperity quickly... I have no doubt that it will happen this time as well."