Israel continues to pound Gaza but its economy is in shambles now: experts

Nearly 11 months into Israel's war on Gaza, Israel’s economy is struggling as the country's leaders grind ahead with its attacks in Gaza that show no signs of ending and threatens to escalate into a wider conflict.

Prime Minister Benjamin Netanyahu has tried to allay concerns by saying the economic damage is only temporary.

But the bloodiest, most destructive war on the besieged Palestinian territory has hurt thousands of small Israeli businesses and compromised international trust in Israel's economy.

Some leading economists say a ceasefire is the best way to stop the damage.

“The economy right now is under huge uncertainty, and it’s related to the security situation — how long the war will go on, what the intensity will be and the question of whether there will be further escalation,” said Karnit Flug, Israel’s former central bank chief who is now the vice president of research at the Israel Democracy Institute, a Jerusalem think tank.

The war has inflicted a far heavier toll on Gaza’s economy, displacing 90 percent of the population and leaving the vast majority of the workforce unemployed.

All banks in the territory have shut. The fighting has killed more than 40,000 people, according to Palestinian health officials.

Further escalation

The drawn-out nature of the fighting and the threat of further escalation with Iran and Hezbollah, have an especially harsh impact on tourism.

Though tourism is not a major driver of the economy, the damage has hurt thousands of workers and small businesses.

On a recent weekday, the formerly bustling port of Haifa, a major hub of Israeli import-export where massive container ships would often stop, was still.

With Yemen’s Houthi group endangering ships passing through Egypt’s Suez Canal, many long-haul ships have stopped using Israeli ports as hubs, said a port official who spoke on the condition of anonymity because he was sharing internal information.

He said Israeli ports saw a 16 percent drop in shipping in the first half of the year, compared with the same period in 2023.

Unemployment

Yacov Sheinin, an Israeli economist with decades of experience advising Israeli premiers and government ministries, said the total cost of the war could amount to $120 billion, or 20 percent of the country’s gross domestic product, a broad measure of economic activity.

In another worrying sign, the Finance Ministry this month said the country’s deficit over the last 12 months has risen to over 8 percent of GDP, far exceeding the 6.6 percent deficit-to-GDP ratio the ministry projected for 2024.

In 2023, Israel’s budget deficit was roughly 4 percent of its GDP.

The unemployment rate has dipped below pre-war levels, Sheinin said, to 3.4 percent in July compared with 3.6 percent in July of last year.

But when taking into account Israelis forced out of the labour market, the figure rises to 4.8 percent, a figure that would still be considered low in most countries.

Meanwhile, many small businesses have closed because their owners and employees were called up for reserve military duty. Others are struggling amid the broader slowdown.

Israeli business information company CofaceBDI reports that some 46,000 businesses have closed since the start of the war — 75 percent of them small businesses.