Vantage | What this war means for Israel's and world’s economy

What has this war already cost the world? More than 5,500 people dead on both sides, more than 15,000 injured, tens of thousands displaced, and many more suffering the horrors of war. And this conflict is expanding. Israel wants a ground operation, so the cost will only shoot up, including the economic cost.

So, what is the economic cost of this war? What will the war mean for Israel’s economy?

The bank of Israel has released an assessment: growth has taken a beating, economic output will contract by at least two to three percent in the third and fourth quarters, the budget deficit is likely to rise and Israel’s currency, the shekel, is losing its value - it has fallen to an eight year low against the U.S. dollar.

As of today, Israel’s economy is in a state of limbo. Earlier, it was expected to grow at a rate of three percent, but now, if the war continues economic growth will cool. The growth rate is projected to fall to 2.3 percent for the remainder of this year.

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What about the next year? It’s expected to be slightly better with Israel’s central bank projecting a growth rate of 2.8 percent.

And here’s something you must know: this is an aberration. In its 75-year history, Israel has witnessed many conflicts, but its economy has remained surprisingly robust. Today, Israel is seen as a tech powerhouse, a key innovation hub in West Asia, with a diverse free-market economy, but this war is testing Israel’s resilience.

The priorities have shifted. The military has been given a blank cheque. Israel wants to win this war at all costs and its army says it’s ready to strike. “Our fighters, the IDF fighters, are ready and determined in the field, they continue training for the day the order is given. We have long weeks of fighting ahead of us, we will act on the most suitable operational timing and according to political instructions,” says Israeli army spokesperson, Rear Admiral Daniel Hagari.

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About 360,000 reservists have been called up. This is an unprecedented mobilisation. These people were engaged in other jobs but now they’re fighting the war. So overnight Israel has lost 360,000 workers. They have gone out of the economy, businesses are short staffed, there are fewer taxis on the streets, several stores are closed, and people are leaving their homes.

Take the case of Sderot. This is a border town barely 12 kilometres away from Gaza. We visited Sderot two weeks ago. It used to be buzzing with activity but after the Hamas attack it has become a ghost town. About 30,000 people used to live there. Now, going by some accounts, over 90 percent of Sderot’s residents have left. Where have they gone? Many have shifted temporarily to other parts of the country.

This is happening in most border towns. Life has been disrupted and these people don’t know when they’ll go home and return to their normal lives. This has the makings of a long-drawn-out conflict.

Economists and ratings agencies are watching these developments. At least two credit agencies have issued warnings saying Israel’s debt could be downgraded. The World Bank too has issued warnings. World Bank President Ajay Banga says we are at a dangerous juncture and that this war could deal a serious blow to the world.

The biggest worry are the oil prices. Even though Israel is neither a major producer nor a supplier of oil, the conflict is drawing in regional players. That is a worry because wars in West Asia tend to disrupt the energy markets. Think of the Iranian revolution of 1978, the Iran-Iraq war of 1980, the first Persian Gulf war of 1990 - all of them triggered a spike in oil prices.

So, markets are nervous. Global oil prices rose marginally today. Traders are keeping a close eye on Israel and a ground offensive, or a wider conflict could impact the entire region and bleed the world.

Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.

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