ANALYSIS - Cost of genocide: Israel heads for economic downturn

By Altay Atli

- The author is the founding director of Atli Global Consulting and a lecturer at Koc University in Istanbul.

ISTANBUL (AA) — Is the Israeli economy heading towards a crisis, driven by the ongoing genocide in Gaza?

According to macroeconomic data released by the Israeli authorities, while the impact of the war on the economy appears to be limited, and some areas even showing signs of recovery from initial setbacks after October 2023, the economy faces a more challenging period in the medium and long term, especially in light of the ongoing humanitarian crisis in Gaza and Israel's increasing isolation by the international community.

According to data from Israel's Central Bureau of Statistics [1], the country's gross domestic product (GDP) grew by 3.4% in the third quarter of 2023 compared to the same period of the previous year, while there was a 4% contraction in the last quarter of the year due to the impact of the war. However, with the relative recovery that started in the first quarter of 2024, this annual contraction eased to 1.2%.

The ratio of public debt to GDP rose from 60.7% in 2022 to 63.4% in 2023. However, this ratio is still below, for example, 70.6% in 2020, the year of the COVID-19 pandemic. As of June 2024, Israel's foreign exchange reserves stood at $210.5 billion, and they have not yet significantly declined. Inflation, which was 3.8% in October 2023, when the conflict began, is currently at 2.9%. This is not a particularly negative picture.

- Possible crises in medium, long term

Prior to October 2023, the Israeli economy was quite stable and had largely recovered from the effects of the COVID-19 pandemic.

The Israeli economy focused on exports, boosted productivity, and invested in technology and startups. These were the conditions in which it entered the war and this is why the country's economic outlook is positive.

While the numbers do not show a major problem in the short term, the factors that gave the Israeli economy a competitive advantage before October 2023 are threatened by the effects of the war, the country's deep political instability, and its growing international isolation.

The current geopolitical situation is increasingly weakening the Israeli economy's links with the global economy, signaling a possible crisis in the medium and long term.

Israel's exports started to increase after the COVID-19 pandemic. However, this was interrupted by the crisis. In comparison to the same period in 2023, the first six months of 2024, the country's monthly exports have been lower every month.

For now, these declines are not to the degree expected given the embargoes imposed by various countries, including Türkiye. For example, exports in June 2024, which were $4.69 billion, are only slightly below June 2023's exports of $5.22 billion [2]. However, a deepening humanitarian crisis in Palestine and the further closure of Israel's export routes could push the Israeli economy, already in a chronic trade deficit, into a bigger bottleneck.

- Ports and trade routes

Not only have Israel's export figures been affected by the crisis, but its logistics centers and trade routes connecting it to the global economy have also suffered. The Port of Eilat, Israel's gateway to the Red Sea, has come to the point of complete closure due to attacks by the Iranian-backed Houthis in Yemen. These attacks targeted both Israeli ships in the Red Sea and the port itself [3]. Just a few weeks prior, the Houthis, along with groups based in Iraq, carried out a drone attack on ships anchored in the Port of Haifa [4]. It was reported in the press that if the conflict in northern Israel escalated, Hezbollah in Lebanon would target the Port of Haifa [5].

As the crisis in Palestine continues, security threats to Israeli ports and maritime trade routes are increasing. The unavailability of ports and shipping lines, even without physical damage, as in the case of the Port of Eilat, can lead to the bankruptcy of these facilities.

- Declining tourist numbers

One of the most striking consequences of Israel's weakening ties with the outside world is the decline in tourist arrivals. In June 2024, the number of tourists entering the country, including members of the Jewish diaspora communities who came to the country for vacation or family visits, fell by 70.1% compared to the same month of the previous year [6]. This decline in tourism, which is normally the strongest sector in the service industry for the Israeli economy, contributes to a significant loss of foreign currency.

- Falling in investment

Israel's economy had been gaining a competitive edge with its breakthroughs in high-tech and tech startups. These sectors rely heavily on strong international cooperation. However, vulnerabilities are now emerging for Israel in the current situation. According to a report by RISE Israel, an economic think tank, the country's startups received an average of $1.7 billion in funding per quarter since the war began, compared to around $2 billion before the war. The number of active investors, including Israeli investors and foreigners investing in the country, decreased by 23% in the first month of the war [7]. A continuation of this trend could deal a serious blow to one of Israel's strongest economic sectors. In the current situation, it is not surprising to see a decrease in investment in Israel.

Lastly, it is worth noting the relationship between Israel and the US. Since its establishment, Israel has received a total of $310 billion in aid from the US, with $80 billion in economic aid and $230 billion in military aid [8]. In March and April of this year, the US pledged an additional $12.5 billion in aid to Israel. However, the deep uncertainties in US politics raise questions about how relations with Israel, and thus economic and military aid, will be shaped after the upcoming elections in November. Despite the effects of the war, rapidly increasing military spending and the populist budgetary choices of Israeli Prime Minister Benjamin Netanyahu's government, the Israeli economy, which has a strong infrastructure for its size, has not yet entered a crisis spiral. However, in order to sustain this situation, the country needs to maintain strong links with the outside world and the global economy. This is where the real threat lies.

*Opinions expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Anadolu.

[1] https://tradingeconomics.com/israel/indicators

[2] https://tradingeconomics.com/israel/tourist-arrivals

[3] https://www.aa.com.tr/en/middle-east/israel-s-eilat-port-in-near-total-shutdown-amid-houthi-attacks-report/3278043

[4] https://www.reuters.com/world/middle-east/yemens-houthis-say-they-targeted-ship-haifa-port-with-islamic-resistance-iraq-2024-06-26/

[5] https://www.jpost.com/middle-east/article-807032

[6] https://tradingeconomics.com/israel/tourist-arrivals

[7] https://rise-il.org/insight/israeli-high-tech-in-the-shadow-of-six-months-of-war/

[8] https://www.cfr.org/article/us-aid-israel-four-charts