Thomas Graham | 2 May 2024

Summary

• The recent Israeli-Palestinian War has damaged Israel’s economy in the final quarter of 2023 and is expected to slow economic growth in 2024. 

• Indicators most negatively impacted have been unemployment, workforce shortages, and investor confidence.  

• Foreign investor confidence is key to the prosperity of Israel’s technology sector, which in turn is responsible for a large portion of the economy.   

The latest round of conflict between Israel and Gaza was initiated with the 7th October 2023 Hamas attack on Israel. It has raised interstate tensions in the Middle East to levels unseen since the Second Lebanon War in 2006. Israel’s economy has been hit as a result, with its Central Bureau of Statistics (CBS) reporting a 5% fall in gross domestic product (GDP) between October and December 2023. This drop, expected to slow Israel’s economic growth in 2024, reflects a lack of labour, increased unemployment, decreased private spending, and weakened investor confidence.  

Workforce shortages have been a key drag on the Israeli economy. The main factors driving the lack of labour, especially in the construction sector, have been the calling of around 360,000 Israeli reservists to the army and the barring of Palestinian workers from entering the country due to security concerns. It is estimated that before 7th October, 18,000 Palestinian workers from Gaza and 165,000 from the West Bank were granted permits to work in Israel. Amidst job shortages, 265,000 Israelis have also temporarily lost their jobs, raising the number of unemployed Israelis from 3.4 to 9.6% in the short term.

CBS also reported a 26.3% drop in private spending in the second half of last year, induced by a decrease in consumer and investor confidence due to the war. This is contrasted with a high increase in government spending, up by 88.1%, on war-related costs such as household compensation and military expenses. An 18.3% fall in trade exports in the final quarter of 2023, mainly caused by the disruption of supply lines, has not persisted into 2024 as Israel has secured these routes.   

Lastly, Israel’s strong emerging technology sector, accounting for 18% of its GDP, 48% of exports, and 30% of tax revenue, has been significantly slowed down by the war. This sector is reliant on foreign investor confidence, which was already affected before the conflict due to fears surrounding political changes proposed by Prime Minister Netanyahu’s judicial reforms. These factors culminated in the creation of only around 400 new Israeli tech startup companies in 2023, compared to 1400 in previous years. Fears of a military escalation between Israel and Iran could further hamper the activities of both internal and foreign investors, predictably slowing the growth of its tech ecosystem until economic confidence can be restored.   

Forecast

• Short-term

  • Israel’s economic growth will be slowed in 2024, reflecting reduced trade exports, the calling up of Israeli reservists for the army, and an interruption of work permits for Palestinians from Gaza and the West Bank.  

• Medium-term

  • The Israeli tech sector will be particularly affected, relying strongly on foreign investor confidence shaken by regional tensions.  

• Long-term

  • The prospect of a protracted war with Iran will further hit Israel’s economic performance in the coming years, with an increase in sporadic attacks by Iranian proxies in Yemen and Lebanon affecting regional supply lines and foreign investor confidence.