Despite the numerous setbacks suffered in Operation Protective Edge, Israel’s economy remains resilient. Amid news of massive budget cuts needed to pay for the latest war and losses to the tourism and retail industries, statistics from many sources project a rapid economic recovery and continued growth of one of the world’s most vibrant small economies.
The war in Gaza has taken a significant economic toll on Israel, felt most sharply by the tourism sector, which comprises some 7 percent of Israel’s economic activity. Israel’s Ministry of Tourism reported that tourism for July dropped by 26 percent from the same period last year, representing a loss of at least $566 million.
Hardest-hit from the ongoing war are the businesses in the south of the country, where the majority of the Hamas rockets hit. Stores and restaurants have suffered from a drop in sales, while manufacturing facilities close to the Gaza border have been impacted by slowdowns in manufacturing due to incessant rocket alerts.
Israel’s Manufacturers Association estimated the total economic impact on Israeli manufacturers for the first round of the conflict at about 1.2 billion shekels.
A number of economic studies indicate, however, that these setbacks are likely to be temporary, with the overall forecast for the country remaining positive. In a study published in early August, Dr. Adam Reuter, former senior officer at the Bank of Israel and the head of several investment firms, found that over the last 30 years Israel’s economy has enjoyed vigorous and sustained growth that continues to this day.
Between 1984 and 2014, Israel’s gross domestic product (GDP) increased tenfold from $30 billion to $300 billion, while per-capita GDP rose from $7,000 to $38,000. Negative indicators fell likewise: The public debt-to-GDP ratio shrank from 280 percent to 66 percent, the external public debt-to-GDP ratio fell from 55 percent to 10 percent, and the budget deficit-to-GDP ratio declined from 17 percent to 3 percent.
Over the same time period the defense budget as a percentage of the GDP went down from 20 percent to 6 percent, and annual inflation plummeted from 450 percent to 1 percent.
Further numbers from this study reveal Israel’s impressive performance in the global market: Foreign exchange reserves rose from $3 billion to $89 billion, and annual exports climbed from $10 billion to $90 billion, of which hi-tech exports accounted for $28 billion in the last year compared to just $1 billion 30 years ago.
The recent war in Gaza is not expected to inflict any lasting damage on economic performance, noted Yoram Ettinger, a former ambassador for Israel and a longtime consultant to the Israeli government. In all three previous wars – the 2006 Lebanon War and the previous two operations in Gaza in 2009 and 2012 – the reaction of the economy has been one of brief downturn followed by rapid and complete recovery, “a ‘V’ and not a ‘U’ shaped graph,” Ettinger wrote in a letter published last week.
The consultant noted that according to the Bank of Israel, “the 2006 war against Hezbollah triggered an immediate drop of GDP from more than 6 percent to a negative growth of 1.5 percent, followed by a swift recovery to almost 10 percent growth in the following quarter.”
Operation Protective Edge is expected to lower Israel’s 2014 GDP by 0.5%, but will likely have “insignificant influence on foreign investors, most of whom seek Israeli high-tech companies, which are minimally vulnerable to rocket and missile fire,” he added. With the Israeli military’s emphasis on minimizing civilian casualties and its focus on defensive rather than offensive technologies, the economy may even receive an incidental benefit from the war: “The expanded global interest in Israeli-developed and manufactured, battle-tested defense systems (e.g., Iron Dome, Trophy, etc.) – which demonstrated their unique capabilities during the Gaza war – is expected to bolster a quick recovery and the continued growth of Israel’s economy,” Ettinger explained.