Israel undergoing profound transformation

At the start of October 2023, Israel could look forward in coming years to a growth rate most high-income economies would be more than happy with, as the IMF projected annual rates in excess of 3% for 2024-27.

There were certainly areas of concern, the Israeli government’s populist agenda and divisive judicial overhaul had sparked fears of capital, companies and talent being driven abroad. But then came a much bigger shock, with the attacks by Hamas — labeled a terrorist group by the EU and US — on Israel, and Tel Aviv’s subsequent invasion of Gaza.

Israel has now undergone a profound transformation, temporarily putting aside its focus on startups and wealth in favor of fostering a wartime culture built on patriotism and unity.

Immediately following the massacre, hundreds of thousands of soldiers were sent to the fronts, leaving jobs unfilled and companies unproductive.

GDP in the fourth quarter of 2023 is estimated to have plummeted by 19%. JPMorgan economists cut their tally for growth last year to 2.7% from 3.3% on the eve of the October 07, 2023 attacks, and for 2024 to 2% from 2.7%.

While almost half of Israel’s deployed reservists have returned home in the past several weeks — allowing companies to reboot and helping the vital technology sector to rebound — other parts of the labor force face more severe challenges.

Hospitality and tourism remain devastated. Nearly half of construction sites are still shut as tens of thousands of Palestinian workers haven’t been permitted to return to Israel to work.

The Bank of Israel forecasts that the conflict will cost about 10% of the country’s estimated GDP of US$530 billion this year, and that Israel’s revenue will decline by 2% as a result of fewer taxes and licensing fees.

Eylon Penchas, who runs a private equity firm near Tel Aviv, is among those adjusting plans. Penchas was due to acquire an industrial company in the southern city of Sderot before it was among those attacked on October 07. Sderot was evacuated. The acquisition was cancelled.

At the same time, Erez Shachar, a managing partner at Qumra Capital, says the business community has been galvanized by what it sees as a new sense of purpose. “There’s a very clear understanding in our industry that we are an essential part of the security of Israel,” he says.

Among the questions about Israel’s economy going forward is whether it will be as internationally connected, as the country rethinks its relationship to the outside world.

The perception that the US universities and global media outlets are Hamas apologists willing to promote anti-Semitism is now so widespread that it has become a recurring punchline on Israel’s Saturday Night Live-like Eretz Nehederet.

Courtesy: Bloomberg