Vantage | Why war is hurting Israel's economy but helping Russia's

Recent economic data from Israel paints a grim picture, with the country’s GDP falling by around 5 per cent in the last quarter of the year. This significant decline, which is much worse than anticipated, is largely attributed to the ongoing conflict with Hamas, the militant group in control of the Gaza Strip.

Before the conflict escalated, Israel’s economy had been showing signs of recovery. In 2022, the economy grew by 6.5 per cent, marking a rebound from the pandemic-induced slowdown. However, the outlook for 2023 was less optimistic, with a projected growth rate of 3.5 per cent.

A war-hit economy

The situation took a downturn following Hamas’ attack on Israel on 7 October, which prompted a military response from the Israeli government. As a result of the ensuing conflict, key economic indicators plummeted. Private spending dropped by over 26 per cent, exports decreased by 18 per cent, and capital investments fell by nearly 68 per cent.

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Two sectors that were particularly hard hit by the fighting were construction and technology, which together account for a significant portion of Israel’s GDP. The construction industry, representing 14 per cent of the economy, struggled due to manpower shortages, while the tech industry, contributing 18 per cent to GDP, also faced challenges with workforce retention.

Israel’s decision to call up around 300,000 reserve soldiers further exacerbated the labour shortage, with the tech industry losing 15 per cent of its workforce. Additionally, many construction projects had to be halted due to the conflict.

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Furthermore, the economic strain caused by the conflict extended beyond direct combat operations. Israel incurred substantial expenses related to relocating citizens living near Gaza and Lebanon, providing housing subsidies and offering financial support to affected families.

Rising military expenditure

Direct military spending also escalated significantly, with the total bill estimated to reach $70 billion by the end of 2025. In contrast, despite facing a stronger adversary and numerous sanctions, Russia’s economy managed to grow by 5.5 per cent in the last quarter, highlighting its resilience and strategic advantages, including a robust energy sector and a larger population.

Despite the challenges, there is optimism for Israel’s economic recovery. Ground operations are expected to wind down later in the year, allowing reservists to return to their jobs. Additionally, there has been no significant corporate exodus from Israel, with some companies even announcing plans for further investment in the country, such as Intel’s recent announcement of a $25 billion project for a new factory.

However, the ongoing conflict underscores the precariousness of Israel’s economic situation and the importance of finding long-term solutions to regional tensions. As the country navigates these challenges, there is a growing realisation that the cost of war far outweighs any perceived benefits, urging policymakers to prioritise peace and stability for the prosperity of all stakeholders involved.

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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