When the current crisis began, on October 7, 2023, only two years had passed since the Corona virus pandemic, which led to the first economic contraction affecting the Israeli economy since the Al-Aqsa Intifada in 2000...

At a time when attention is focused on the military, political and security repercussions of the “Al-Aqsa Flood” operation, which was launched by the Islamic Resistance Movement “Hamas” against Israeli military sites and settlements in the vicinity of the Gaza Strip, on October 7, 2023, and the subsequent Israeli aggression against this. Gaza Strip, the effects of the economic war are increasing, especially for Israel. The confrontation caused severe damage to its economy during the emerging Corona Virus (Covid-19) pandemic crisis, so much so that its leaders boast that its economy was one of the most successful economies in confronting the pandemic through direct state intervention.

The Israeli economy before the crisis

When the current crisis began, on October 7, 2023, only two years had passed since the coronavirus pandemic, which led to the first economic contraction affecting the Israeli economy since the Al-Aqsa Intifada in 2000. The government launched a set of economic recovery packages at a cost of about $50 billion; This led to a record deficit in its budget, and an increase in its debt to about three-quarters of the size of its total economy[1]. With limited government intervention, the Israeli economy was able during the following two years (2021-2022) to restore its balance in view of the noticeable growth in domestic demand, both consumer and investment, and to achieve economic growth of about 8.6 percent and 6.5 percent, respectively, which are generally high rates. , compared to any other economy in this period[2]. Accordingly, the government’s public finances recovered and its indicators began to improve, especially the size of public debt relative to domestic product, which returned to stability at levels close to those before the pandemic. In contrast, estimates of the Israeli economy during the current and next years, according to pre-war data, indicate that it will return to growth according to its natural path, in the range of 3 percent annually.

How did the Israeli economy receive the shock of October 7?

The Israeli economy is considered a structurally solid economy and is classified among the advanced economies in the region. This economy has a service base, a large industrial base, and an agricultural base on a smaller scale, all of which rely on advanced technology. Despite the structural strength on the one hand, and the great support that Israel received from the Western camp, led by the United States of America and its European allies on the other hand, after the painful military strike on October 7, these two factors did not prevent the global credit rating agencies from adjusting the future outlook. to the Israeli economy from “stable” to “negative.” Standard & Poor’s Global expected the Israeli economy to contract by about five percentage points in the last quarter of this year[3], and Moody’s and Fitch both announced... Placing Israel's domestic and international credit ratings under review leading to downgrade[4]. These reviews represent only a preliminary forecast of the impact of the shock that Operation Al-Aqsa Flood directed on the Israeli economy. Therefore, more severe negative assessments may follow if Israel fails to contain the economic repercussions of the conflict, and the state of tension on the northern front continues and escalates into stronger and broader military confrontations. However, if the conflict expands further and turns into a regional confrontation, which is still a weak possibility according to current estimates, the results will inevitably be disastrous for the Israeli economy.

The Israeli currency (the shekel), which was under pressure related to the “judicial reforms” crisis and the protests that followed it since the beginning of this year, was the most affected by the October 7 attack. Since the outbreak of the crisis, the shekel has lost more than 5 percent of its dollar value, reaching its lowest levels in eight years, despite the direct intervention of the Bank of Israel (the central bank) and its pumping of about $30 billion to contain the growing demand for the dollar and prevent a further deterioration of the shekel exchange rate.[ 5]. It appears that the central bank chose to sacrifice part of its foreign currency reserves in order to avoid increasing interest rates. So that the potential decline in domestic consumer and investment spending does not deepen, and to prevent the economy from sliding into a deeper recession, which allows it to be said that the Al-Aqsa Flood operation shook the Israeli economy as much as it shook the security, military, and political establishment, and placed the economic policies of the Israeli government before difficult challenges. A rapid decline in the shekel exchange rate would create additional inflationary pressures in addition to the shock received by the production chain and the resulting increase in the cost of shipping and insurance on imports. If the Israeli authorities fail to contain inflation, livelihood imbalances may result. Which, in addition to security pressures, may destabilize Israeli public opinion’s support for the government’s military and political agenda.

The effects of the war on the Israeli financial market were no less bad; The stock market lost about 9 percent of its nominal value during the first week of Operation Al-Aqsa, which is the largest weekly loss that the index has suffered over the past ten years[6]. This market's losses continued in subsequent weeks, reaching more than 22 percent, driven by foreign investors selling their shares, especially banking sector shares. The share prices of the five largest banks fell by 20 percent, which is the largest percentage of decline since the Corona pandemic. Thus, capital losses in the stock market since the outbreak of confrontations in Gaza are estimated at more than $20 billion[7]. These losses were driven by the increasing severity of potential future risks and the growing state of uncertainty related to the security and economic conditions in Israel.

From financial challenges to broader ramifications

It is clear that the Israeli government, in an effort to restore the prestige of deterrence, is throwing all its military weight into its ongoing aggression against the Gaza Strip, not caring about its financial cost. It is aware that its failure to restore its image will have more serious repercussions. Not only related to security aspects, but also politically, socially and economically. According to the Israeli Minister of Finance, the financial cost of the military operation carried out by Israel against the Gaza Strip is close to 250 million US dollars per day, or about 1.75 billion dollars per week, and about 7.5 billion dollars per month. That is, about 1.5 percent of its gross domestic product[8]. The United States, aware of the nature of the financial challenges facing its ally Israel, was quick to announce an urgent aid package to enable it to move forward with its military operation against the Gaza Strip. US President Joe Biden submitted to Congress an urgent financing project for Israel worth $14.3 billion, as part of a broader financing package that also includes Ukraine and Taiwan[9]. This is in addition to the costs that the United States itself will bear, as a result of the direct military support it provides to Israel in its aggression against Gaza, including sending two aircraft carriers with its battle groups to the region[10]. Most likely, the large amount of financial support mobilized for this aggression will not be sufficient to ensure the ability of the Israeli public treasury to cope with the requirements of the military campaign, including the cost associated with calling up about 360,000 reserve soldiers, and the programs that are likely to be launched to compensate for the losses of large companies and institutions. Small and medium enterprises also suffered from the cessation of their work and a decrease in their incomes as a result of the field consequences of the military operation and other adaptive programmes.

The consequences of the war will not be limited to its direct financial burdens, but will also extend to domestic demand, both consumption and investment, which is expected to witness a noticeable decline. Because of fear, consumer and investor confidence declines. The evidence that appears, through the reactions of Israeli society and the severe state of confusion it is experiencing, leads to the conclusion that the Israeli economy is heading towards a deep crisis. The repercussions of the Al-Aqsa Intifada in 2000 on the Israeli economy can be inferred to estimate the repercussions of what is happening today, even if the shock is more severe this time. The same applies to external demand, whose sources quickly began to comply with the facts of the war. Tourism and its related services, which are considered an important tributary of the Israeli economy and its general budget with a total output of about 7.7 billion dollars, have been subjected to complete paralysis[11], as the data indicate that almost all reservations in hotels and tourist establishments have been cancelled, while Half of its capacity has been used so far to shelter families evacuated from areas and settlements close to the border with Gaza, and it is likely to reach three-quarters of this capacity in light of the plan to evacuate residents of cities and towns on the Lebanese border. These are additional costs that will be borne by the budget of the occupying state. This will contribute to the widening of its financing gap. The situation is not much different for the transportation sector, and air transportation in particular. A group of international airlines announced the suspension of their flights to Israel, and the role of civil air transport became limited to evacuating foreign nationals and Israelis fleeing the war. As a result, the share price of El Al Airlines declined by 19 percent since the start of the Al-Aqsa Flood operation[12].

It is expected, albeit less severely, that merchandise exports will decline, and the Israeli trade deficit will worsen due to logistical bottlenecks imposed by the field data of the war, as well as competitive pressures resulting from the high cost of exports driven by the high cost of shipping, insurance, and fuel. The world price of oil rose by about 5 percent in the first week of the Israeli aggression, and its prices fluctuate day after day, higher than the level they were at before the aggression on Gaza.

The supply side will not be immune to these effects; The exceptional call-up of all reserve forces will empty the driving sectors of the Israeli economy of their operators, and the state of fear surrounding foreign workers and their flight outside Israel, and the cessation of the use of Palestinian workers, will cause major paralysis in support services.

The deeper effects have yet to occur

The economic costs that Israel will bear as a result of its continued aggression against the Gaza Strip will be huge. Not only for the government and its general budget, but also for companies, institutions and the general population who ultimately bear these costs. In order for these repercussions to be addressed objectively, guided by previous experiences, the strength of the Israeli economy and its ability to contain the consequences of such crises must not be overlooked, even if that comes at the expense of its growth and development process over many years.

But we must not overlook the difference between the current confrontation and all that preceded it between the occupation and the Palestinian people. The surprise attack on October 7 was not only a tactical shock to Israel, but also a practical test of its security and defense system and a living witness to its failures. The real problem that Israel will face after the war stops will be the state of uncertainty surrounding its defense system and the myths it has created about its military and intelligence capabilities. Economically, this deep state of uncertainty is expected to discourage investment, reduce consumption levels, and hit the tourism, transportation and other services sectors. This situation will also affect the attractiveness of the Israeli economy to foreign workers. Which means that he will face a series of wage increases due to a shortage in labor supply, especially if this situation leads to reverse migration out of Israel.

It is expected that the state of uncertainty will have noticeable negative effects on the location of the settlements and their settler residents, and investments in their various forms, in the southern regions adjacent to the Gaza Strip and the northern regions adjacent to the border with Lebanon. Which leads to the population being concentrated in the centre, exacerbating the real estate and population crisis and increasing their costs. The government will find itself forced to provide broad incentive packages to persuade investors and individuals to reside and invest in the border areas, which will result in long-term pressure on its general budget.

After Israel's defeat on October 7, confidence in its military industries, which top the list of its exports, is likely to decline, after its intelligence and defense system failed to prevent the attack that surprised it using homemade Palestinian attack techniques.

Conclusion

The Al-Aqsa flood operation will have profound repercussions on the Israeli economy. Not only because of the direct financial cost associated with financing military operations, but also, and more severely, because of the extended and ripple effects that will make the Israeli economy unbalanced for a period of time. But these effects, their depth, and their temporal extension will all depend more on the state of uncertainty after the major collapse that the Israeli security and military system suffered on October 7. The impact of the surprise, and the brutal crimes committed by Israel against the residents of the Gaza Strip in response, will remain among the concerns present in the minds of Israelis, investors and visitors, which means that the economic crisis will be longer and have a deeper impact than ever before.