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Israel and the challenges of a wartime economy
Despite significant workforce challenges and the threat of a brain-drain from the country, Israel's economy has proved remarkably resilient
Israel been involved in a multi-front war since the treacherous Hamas attack of 7 October, 2023. Conflict can have a devastating impact on national economies, as the Russian people have learned to their cost in the years since 2022 and Iran has discovered since the co-ordinated US-Israel assaults on nuclear facilities and infrastructure.
Israel too has suffered. The frequent mobilisation of reservists has placed huge strains on a labour market. The state already suffers from poor participation in the workforce among the Charedi population and under-employment among Arab Israelis, particularly women.
The constant missile and drone bombardment on Israel’s cities and constant sirens have caused huge stress to family life. Some 150,000 Israelis, some of them talented tech and AI engineers, have left the country over the last three years although the pace of outflow has dipped this year.
Many have family and friends who have decided to take a ‘time out’ from Israel: with an intention to return. One of my own cousins was drawn to Austin, Texas by a well-paid Dell tech job. His wife and her wider family have established a successful bakery and patisserie enterprise in the North of the city.
Reading some of the media coverage, one might think that Israel, so highly regarded for its R&D, tech and cyber defence infrastructure before the Gaza conflict, might be suffering from economic and trade isolation. At the peak of Israel’s campaign in Gaza there were frequent reports of America’s ‘Magnificent Seven’ tech giants pulling out of Tel Aviv. Andy Burnham’s government, under pressure from backbenchers and pro-Palestinian sympathisers, has moved towards an embargo on goods and services generated in West Bank settlements.
Such disruption and hostility could have had a devastating impact on Israel’s economic condition. Quite the contrary. Despite the high fiscal costs and economic mayhem of running a wartime nation, the country’s economy is showing tremendous resilience. In most countries elections are won and lost on ‘bread and butter’ issues. Bill Clinton’s famous phrase ‘it’s the economy, stupid’ still resonates among politicians some 34-years after it carried him to the White House. The impact on Israel’s 27 October elections, largely debated in strategic terms, is a known unknown.
Every year the Washington-based International Monetary Fund (IMF), the independent arbiter of a nation’s economic fortunes, conducts an annual inspection required under the articles of IMF membership. The inspection team confers with the finance ministry, prime minister’s office, central bank and independent forecasters and banks.
The Netanyahu government and Israel emerged from this summer’s opening of the books relatively unscarred. The forecast for the nation’s output was downgraded from a healthy 4.8pc to 3.5pc. Using a favourite measure of the post-2024 British Labour governments, that means Israel, for all its difficulties, is growing faster that all the richest G7 countries (including the United States).
Israel doesn’t entirely receive a clean bill of health. The IMF warns that disarray in jobs and production caused by constant conflict in the Middle East will pose medium-term problems. The country faces labour supply difficulties caused by frequent military mobilisations and reduced availability of non-Israeli workers – Palestinians and those from further afield.
In common with most of the Western democracies it also faces a cost-of-living problem. Energy prices are set globally, and Israel suffers from the general interruptions of supplies through the Strait of Hormuz and the highly volatile global oil price. Similarly, it faces elevated costs due to supply shortages such as fertilizers, some foods and manufactured goods. As might be expected, there are budgetary problems. The Fund recommends the government finds ways of raising new revenues.
Israel is fortunate in that the ratio of debt to national output, projected at 70pc this year, is lower than in most industrial nations. That, together with tight monetary controls, is keeping the shekel strong in an uncertain world where mighty currencies, such as the dollar and Japanese yen, are weak.
Wartime doesn’t necessarily have to wreak havoc. Much of the post second world war recovery of the United States, from the Great Depression of the 1930s, is credited to the power of the military-industrial complex.
Israel can claim similar economic gains. Israeli military technology and expertise is being sought across the globe – although not much is heard about it. Germany, for example, is spending €3.8bn on the Israeli-developed Arrow3 missile defence system in a security partnership which includes cyber, AI and drones.
The country is also seen by the IMF as among the leading advanced countries, along with the UK, ‘to benefit from AI adoption.’ All of which is a more positive message as we approach New Year 5787
Alex Brummer is City Editor of the Daily Mail
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