Israel can recover economic losses but not investor confidence

Thousands of companies affected

In Israel, the war's economic repercussions can be felt in the finances of each household, in all parts of the labour market, in various sectors, in companies of all sorts, and fiscal terms. The Financial Times reported that the war has put many businesses in all industries on hold.

Israel's Central Bureau of Statistics said one in three companies either shut their doors or operate at 20% of their capacities. It estimated that the private sector has lost more than 50% of its revenues, adding that the losses are focused in the south, where two-thirds of the companies either stopped operations or kept operating at minimal capacity.

Due to the evacuation of cities, towns, villages, and settlements for security reasons in various parts of Israel, especially near Gaza and southern Lebanon, not to mention the closure of educational institutions and the calling in of reservists, some of them engineers in the high-tech sector, 764,000 Israelis are unemployed, a figure equal to a fifth of the Israeli workforce, according to The Financial Times.

Bloomberg reports that Israel has allocated $8bn for the war, which is a loss to its economy, while the war drains an additional $260mn per day from the Israeli economy.

Unnecessary spending

Meanwhile, right-wing Israeli Prime Minister Benjamin Netanyahu, to keep his even more right-wing allies from abandoning him, continues to appease them by spending on unnecessary projects — especially in wartime when belligerent countries mobilise their capabilities for the war effort.

The projects of Netanyahu's allies include ideological education and settlement projects. Netanyahu's latest payment in this regard amounted to $3.6bn, which he allocated to the projects of far-right parties in his coalition government.

Months before the war, Hamas and Israel reached economic understandings, including easing the Israeli blockade on Gaza through many measures, the most important of which was granting thousands of Gazan workers permits to work inside Israel, especially in the field of construction.

With the outbreak of the war and Israel forcing its Palestinian workers to return to Gaza in inhumane conditions in many cases, several construction projects inside the Jewish state have stopped, and many have begun demanding financial support from the Israeli government to withstand the pause pending the resumption of work. 

One of the affected sectors is the hotel sector, which has been forced to house displaced Israelis from unsafe cities, towns, villages, and settlements. Many hotels are forced to ask their service providers, regular customers, and even employees to provide them with money to survive.

The hospitality sector has generally suffered a collapse in consumer spending on its services, as households have cut their non-essential spending since the fighting began.

The OECD estimates that international tourism amounts to 2.8% of Israel's GDP and supports 230,000 jobs in the sector, or about 6% of the labour force. The number of tourists in October is estimated to have collapsed by 76% compared to the same month in 2022.

Blow to tech sector

In a report released two weeks after Hamas' operation, the think tank Start-Up Nation Central reported that the technology sector, crucial to Israel's economy (18.1% of GDP), was suffering heavy losses due to the war – which was in its early stages.

Read more: Israel's Silicon Valley on the brink of collapse

About 80% of tech companies reported being hit by the worsening "security situation." At the same time, a quarter stressed suffering "double damage, both in terms of human resources and with regard to access to venture capital."

The sector's engineers and workers have not escaped the call to fight, while investors are no longer reassured about their investments in light of the rapid collapse of the security situation within the Jewish state.

According to the report, 40% of tech companies reported that investment agreements had been postponed or cancelled, while only 10% of companies could hold meetings with investors.

Eastern Mediterranean gas

The Gaza war has underscored the region's serious geopolitical dangers, and if the war spreads, the oil and gas sector won't survive. 

On energy, Noam Raydan, a senior fellow at the Washington Institute for Near East Policy, argues that the energy sector is one indicator of the high costs the region will pay in the event of a broader conflict, "with some effects already measurable in certain countries."

"As Israel boosted its gas production from 16.11bn m3 in 2020 to 21.92bn m3 last year, it expanded energy cooperation with Egypt," she wrote in a report published by the institute.

"Washington, meanwhile, brokered a historic maritime boundary deal between Israel and Lebanon, allowing the two to commence gas exploration and drilling in once-disputed waters. On the surface, the region appeared to be entering a phase of energy cooperation and security.  Then came Israel's war with Hamas."

Read more: Economic ripple effects from Gaza war felt across the globe

On 9 October, Israel cut off output from Tamar, its second-largest gas field, due to safety worries. Gas exports to Egypt, suffering growing domestic consumption, are now shrouded with uncertainty.

Later, taps in Israel's oil terminal in Ashkelon were turned off to vessels as rocket attacks intensified. If the conflict spreads to include Hezbollah in Lebanon, it will exacerbate Lebanon's already acute energy crisis, according to the report. 

While Israel's potential gas exports to the European Union are 15% lower than the 155bn m3 of gas Russia sold to the bloc in 2021, before the Ukraine war, Israeli gas could be useful to European governments as they seek to diversify their supplies and reduce their dependence on Moscow.

To this end, the European Union signed a memorandum of understanding with Egypt and Israel in June 2022 to ship gas produced in either country to the continent via two underutilised LNG facilities in Egypt, the Shell-operated Idku plant and Eni-operated Damietta plant.

"Increasing output from Egypt, however, would require increasing production and developing infrastructure," the report said. 

Israeli government figures show "that in 2022, 63% of its gas exports went to Egypt and 37% to Jordan.  The exports to Egypt, transferred from Ashkelon to Al-Arish, have increased since 2020.

Last year, Israeli gas flows to Egypt via the East Mediterranean Gas pipeline increased to 5.81 m3, from 4.23 m3 in 2021 and 2.16 m3 in 2020.

While Egypt produces its own gas and aspires to become a regional hub for that sector, it has experienced a production decline in recent years, affecting its ability to meet domestic demand and export LNG."

Raydan concluded by saying:  "Over the past few years, Washington has encouraged East Mediterranean states to diversify their energy sources, all the while tackling climate change. This energy diplomacy succeeded in some places, but the Gaza war has exposed the area's high geopolitical risks."

"If the war expands, the hydrocarbon sector won't be spared the economic ramifications, and the energy plans of regional governments will be postponed for years to come."