Gaza war pushing Israeli economy to recession, warns Israeli economist

By Rabia Ali and Gokhan Ergocun

ISTANBUL (AA) – Mounting fears and uncertainties surrounding Israel’s protracted war in Gaza are taking a toll on its economy, with a prominent economist warning that the country is heading towards a recession.

“I think that most chances are that this will be a recession and might be a deep recession too because the amount of uncertainty in our life is still there,” said Joseph Zeira, a professor of economics at the Hebrew University of Jerusalem.

Israel’s war on Gaza is now almost in its fourth month, leaving large swaths of the Palestinian territory reduced to rubble and more than 22,000 Palestinians dead, most of them women and children.

Despite growing international pressure, the Israeli leadership is refusing to end its deadly campaign, which many rights groups and experts have termed a textbook case of genocide.

Speaking to Anadolu in a video interview, Zeira said the war’s impact on the Israeli economy is growing by the day, paving the way for 2024 to be “a recessionary year.”

“Overall, I think … domestic demand, tourism, purchases of big consumption items and most importantly, investment, these will go down and … (with) the rise in military costs … will make it a recessionary year.”

Tourism in Israel has already seen a major decline since Oct. 7.

Between Oct. 7 and Oct. 19, more than 40% of flights to the country were canceled, while tourism activity in October was 76% lower compared to October 2022.

In November 2023, only 38,000 tourists came to Israel, a sharp dip from about 370,000 in November 2022, according to Tourism Ministry data.

At the end of October, some 300 Israeli economists issued a stark warning to Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich.

The economists, who included the former governor of the Bank of Israel, a Nobel laureate professor and former senior Finance Ministry officials, said the economy was facing a “difficult period,” stressing that “immediate measures need to be taken to prevent major damage.”

On Oct. 9, the Bank of Israel also intervened in markets by selling $30 billion in an effort to moderate volatility in the shekel exchange rate.

- Signs of recession

According to Zeira, the signs of a recession were already visible in 2023.

Two major events had a significant economic effect, he said, with the Gaza war being “definitely the greatest,” along with the impact of the months of unrest over the government’s controversial judicial overhaul plan.

“So, it already had some elements of a recessionary effect, although we cannot tell and cannot estimate how big it was,” said the analyst.

This “definitely increased the risk for investors and it definitely started to reduce investments,” he added.

Zeira pointed out that similar economic situations were seen during previous bouts of Israel-Palestine tensions, such as the years of the first and second Intifadas.

Israel faced recessions during the First Intifada in 1989, followed by another in 1997 and 1999, and a “very long and very deep” recession during the Second Intifada from 2000 to mid-2004, he said.

There was a severe decline in investments during these periods, he said.

In wars with Palestinians, the civilian population is harmed, unlike the wars with Egypt or Syria that were far away, he said.

“These wars hurt the civilian population. Therefore, people go out less and when you go out less, you buy less, especially big things,” he said.

The “rising risk” during a conflict particularly drags down investment levels, he said.

“Uncertainties like how long the war will run, whether other countries will get into it, what will happen in the West Bank? Will it also erupt in an Intifada or mini-Intifada or not? So, the amount of uncertainty is quite large and usually uncertainty reduces investment,” he added.

Zeira clarified that investment is not limited to the financial sphere.

“I’m talking about real investment, like building a new factory or building a new building in a company or buying new machines or buying cars for your company, things like this,” he explained.

- Cost of war

In Zeira’s assessment, the cost of Israel’s war on Gaza will be higher than the current projections.

“I would put a big doubt on everything and I will say that the costs are going to be much, much higher … I think the current estimates that I read in the newspaper for 2023, for the budget of ‘23, that’s going to be 2% of GDP. I doubt it,” he said.

The military reserve situation has a major impact, he said, as “we’re going to lose productivity output in the economy because when people are not working, they harm production.”

“I don’t know how to estimate it, but it might be some percentages of GDP, depending on how long this reserve service will be. And so far, it seems to be quite long.”

The second problem is that part of this cost will have to be paid by the government, he said.

“Not that the government pays the direct labor compensation of the reservist, but the people who own the companies where these people work are also losing money and they come to the government and say help us,” he explained.

That is a huge loss of income, output and productivity, he added.

“I measured the risk of the business sector compared with other countries, and it’s much higher than in other countries, meaning they have much less capital,” said Zeira.

“If you compare the capital output ratio in Israel to other countries, we have a ratio in the business sector something like 1, while in the US, it’s 1.6, and in western European countries, it’s around 2. So, we have half the amount of capital in the economy relative to output than in Western Europe.”

The risks to the economy are “going to stay as long as we don’t make peace,” said Zeira.

“So, as long as Israel doesn’t go and make peace with the Palestinians once and for all, we’re going to lose a lot of money on a permanent basis. In addition to that, we’re going to lose a lot of money in the world because of the recession that has come,” he added.

- Impact on Palestinians

Zeira said the people who will suffer the most from a recession in Israel will be “Arab citizens of Israel,” as well as the Palestinians.

That is not only about Gaza, “which is a huge tragedy, which is facing 100% unemployment as nobody is working except for a few hospitals,” he said.

“But even if you look at the West Bank, since the beginning of the war, the workers who used to go to work in Israel from the West Bank are not allowed to go and the government is still refusing to allow them to go, which means a loss of huge amount of income to people in the West Bank,” he explained.

“If Israel has a recession, they will have a recession too because Israel will buy less things from them … So, the Palestinians are going to suffer from this war immensely, not just directly, but even economically.”​​​​​​​