Overview of Israel's economy in the "fire pan" of the Middle East

(Dan Tri) - Israel, once the most prosperous country in the world, is now in recession. Its technology, agriculture, construction, and tourism industries have all been dragged down by the longest and most costly war in the country's history.

Once the most prosperous country, then...

Israel is a small country with an area of ​​only 22,000 km2 and a population of more than 9 million people, poor in natural resources and located in the middle of a harsh desert. However, thanks to a development strategy based on knowledge and innovation, Israel has built a developed market economy .

The country's GDP is expected to reach about $540 billion by 2024, ranking 19th in the world , with a GDP per capita of $54,000 and belonging to the group of high-income countries.

Israel's banking system and capital markets are also robust, with the Tel Aviv Stock Exchange (TASE) playing a central role, helping the country maintain strong foreign exchange reserves.

Israel's economic strength comes from its focus on high-tech and service industries, particularly information technology, cybersecurity, medical devices, and agricultural technology.

Following the outbreak of conflict, Israel is facing its most serious economic challenge in decades. According to data from the Organization for Economic Cooperation and Development (OECD), Israel's economy is witnessing the sharpest decline among the organization's member states.

With the prospect of further escalation of the conflict, Israel estimates that the cost of the war could reach $67 billion this year, forcing the government to face difficult choices about resource allocation that could lead to spending cuts in some areas or to incurring more debt.

The Port of Haifa was once one of the busiest ports in the Eastern Mediterranean (Photo: Daily Sabah).

The deteriorating financial situation has led international credit rating agencies such as Fitch to downgrade Israel's credit rating from A+ to A in 2024, citing a projected budget deficit increase from 4.1% to 7.8% of GDP.

The conflict has had a profound impact on many sectors of the Israeli economy. The construction industry saw a decline of nearly a third in the first two months of fighting, while agricultural output fell by a quarter in some areas.

An estimated 60,000 Israeli businesses are at risk of closing this year due to labor shortages, supply chain disruptions and declining business confidence.

The Port of Haifa, Israel’s largest import-export hub, is in an unprecedented state of disrepair. According to a senior official there, international container ships have stopped using the port as a transit point due to concerns about attacks while passing through the Suez Canal.

Statistics show that cargo traffic through Israeli ports fell 16% in the first six months of this year compared to the same period last year.

In late September, as the conflict in the Middle East dragged on for a year and Israel’s credit rating continued to be downgraded, Finance Minister Bezalel Smotrich insisted that the economy was under pressure but was still standing. “The Israeli economy is under pressure from the longest and most expensive war in the country’s history. However, Israel is a strong economy, and it is even attracting investment,” the finance minister said.

As the conflict spreads across the region, the economic costs will also increase for Israel and other countries in the Middle East. "If the recent escalation of events turns into a longer and more intense war, economic activity and growth in Israel will suffer significantly," Karnit Flug, former governor of the Bank of Israel, told CNN.

Market vendors said the current business situation is worse than during the pandemic (Photo: Daily Sabah).

Israel’s economy could shrink even more, according to the worst-case scenario from Tel Aviv University’s Institute for National Security Studies. Even in the milder scenario, the country’s GDP would shrink due to a rapidly growing population and falling living standards.

Last year, before Hamas attacked Israel, the International Monetary Fund (IMF) predicted the Middle Eastern country would grow 3.4% this year. Now, that rate is only 1-1.9%. The IMF also lowered its growth forecast for the country next year.

The Bank of Israel predicts that the conflict could last into 2025, causing significant financial and economic damage. It has also cut its economic growth forecast for this year to 0.5%. The rate will be just 3.8% in 2025. In July, the agency's forecasts were 1.5% and 4.2%, respectively. At that time, it said the conflict with Hamas would last through the year.

"The war has a huge economic impact. We do not know when business will return to normal. The current situation requires careful consideration of monetary and fiscal policy to ensure financial stability and continued economic growth," said Governor Amir Yaron.

Dilemma

The economic recovery in the second half of 2025 will also slow. In addition to lowering the forecast, the Bank of Israel also kept its benchmark interest rate unchanged at 4.5% for the sixth consecutive time, citing accelerating inflation and a weakening shekel.

In fact, the country's central bank no longer has room to cut interest rates, as inflation is accelerating, wages are rising and government spending is escalating due to the war.

In January 2024, the Bank of Israel cut interest rates for the first time in four years, from 4.75%, to support households and businesses as the economy takes a hit from the conflict with Hamas. Since October 2023, the cost of the war has reached $66 billion.

A deserted street with few tourists after the escalation of fighting (Photo: Times of Israel).

The agency estimates that the cost of the war could reach $66 billion, including military and civilian spending, such as housing for thousands of Israelis forced to flee their homes. That would be 12 percent of GDP.

Although Israel's finance minister is confident that the country's economy will recover after the war, economists fear the damage will be long-lasting. The former governor of the Bank of Israel predicts that the Israeli government may reduce public investment to increase resources for defense.

Israel’s budget deficit has doubled since the war, to 8% of GDP. Its borrowing costs are set to rise sharply, with its credit rating downgraded by major rating agencies in recent months.

Brain drain

Even more conflict and economic downturn could cause a brain drain in the Middle Eastern country, where technology currently accounts for 20% of Israel's GDP.

“It only takes a few thousand people to have a big impact. Because the technology industry depends on a few creative and entrepreneurial individuals,” the former governor of the Bank of Israel warned.

Increased conflict and economic downturn could cause a brain drain in Israel (Photo: KO).

Recent instability has forced most of the country’s new tech companies to register overseas, despite the tax benefits of registering domestically. A large number of companies are also considering moving operations outside Israel.

Other sectors have been hit even harder. The labor shortage has pushed up vegetable prices and caused home construction to fall sharply.

The number of foreign visitors to Israel has also plummeted over the past year. The Israeli Ministry of Tourism estimates that the war has cost the industry nearly $5 billion. The tourism industry has been hit hard as the number of international visitors has plummeted, pushing hotels into bankruptcy.

Source: https://dantri.com.vn/kinh-doanh/toan-canh-kinh-te-israel-giua-chao-lua-trung-dong-20241019005806987.htm