How has the war with Hamas damaged Israel’s economy?

Business

In the wake of escalating conflict between Israel and Hamas, the nation’s economy stands at a critical crossroads. A sudden workforce shortage, mass military mobilization, stock market turbulence, disrupted supply chains, and anxious consumers have all left their mark on the country’s economic landscape in recent days.

As Israel recovers from – and retaliates to – one of the darkest days in its history, questions arise about the road ahead for the country’s economy, both in the immediate future and in the face of long-standing economic challenges.

The business sector is understaffed 

The IDF has summoned over 300,000 reservists to duty as part of the ongoing operation against Hamas. This mass mobilization, while a crucial measure for national security, has sent shock waves through the country’s business realm.

With such a staggering number of skilled workers called away from their civilian roles, a sudden workforce shortage has emerged, leaving businesses in a precarious position – at least temporarily.

In the face of this workforce void, non-essential businesses across Israel now find themselves at a critical juncture. The decision of whether to continue operations or temporarily suspend them has become a pressing concern. These businesses must carefully weigh the risks and benefits, taking into account the varying degrees of physical safety dictated by their geographic location within the country.

A STAGGERING number of skilled workers have been called away from their civilian roles. (credit: FLASH90)

The ripple effects of this workforce shortage are multifaceted and pose considerable challenges to businesses. Reduced productivity is a near certainty as is the absence of a substantial portion of the workforce, inevitably hampering daily operations.

Project delays are also anticipated, as key personnel may be unavailable for critical tasks. Moreover, the burden placed on the remaining employees who continue to work under these challenging circumstances could lead to increased workloads and heightened stress levels, potentially impacting overall efficiency.

In essence, businesses in Israel now find themselves in a delicate balancing act, navigating the intricate intersection of national security imperatives and economic viability.

The decisions they make in response to this unprecedented workforce shortage will not only influence their immediate economic survival but may also have lasting implications for their long-term stability and resilience in the face of ongoing conflict.

The stock market takes a dip

Shares on the Tel Aviv Stock Exchange plummeted on Sunday in response to Saturday’s surprise attack by Hamas.

The TA-35, TA-125, and TA-90 stock indices fell by around 6%, with the TA-Bank index and construction, building, and insurance stocks taking even steeper dives.

Ori Greenfeld, chief strategist at Psagot Investment House, pointed out to the Times of Israel that this war is expected to have a more significant effect on the Israeli economy than prior events.

“The reason for this is that the financial markets are ultimately the source of the Israeli economy, and if in the previous operations in the South the Israeli economy was not substantially harmed, then today such a scenario is too optimistic,” Greenfeld explained.

“If in the past the reaction in the markets was for a day or two at most, it is likely that this time we will see the local markets having difficulty recovering quickly.”

That said, the Tel Aviv Stock Exchange saw slight gains on Monday and Tuesday. Key indices like the Tel Aviv 35 and Tel Aviv 125 rose by around 1% each day, bringing the overall weekly change to -4.58% as of 10:30 a.m. on Tuesday.

Store shelves are lacking, but a supply shortage is unlikely

Store shelves have been notably bare during the first week of the war, as a combination of disrupted distribution and panicked consumers have rattled stores’ ability to keep up with demand.

In response to this, Shufersal announced on Tuesday that it would be limiting the purchase of eggs, milk, bread, and water per customer in order to ensure that there’s enough to go around. CEO Ori Watermann cited “responsibility towards all customers, heavy demand, supply difficulties, and a partial shortage of products in branches” as the primary factors behind the decision.

Joseph Gitler, founder and chairman of Israel’s largest food nonprofit, Leket Israel, addressed concerns about food shortages during the ongoing conflict in an interview with The Jerusalem Post this week. He pointed out that shortages often occur during times of war, as the logistics infrastructure isn’t designed to handle such emergencies. He likened it to events like Hurricane Katrina or 9/11, where the system is simply overwhelmed during the initial stages of a national crisis.

Gitler acknowledged the challenges faced by the military, local communities, and municipalities when trying to ensure food supply during a crisis. “When these things happen, there are going to be soldiers who get to bases and there’s just not enough food or there’s not the right food; there are deliveries that can’t or won’t get made to and from places that are under missile attack, so shelves end up empty; or workers get called for reserve duty and now no one’s running the cow shed and so they’re short on milk,” he said. “It’s to be expected.”

He reassured Israelis that the overall food supply here is not at risk of drying up, as the country is relatively self-sufficient in many food items, and he believes the country’s ability to import food remains intact unless there are unforeseen global factors. While there might be occasional shortages on store shelves, Gitler underscored that it won’t lead to widespread hunger.

“No one’s going to starve, and no one’s going to go hungry. There may be a few days where there are some things missing, but presuming we’re able to get ahead of the situation militarily, things will go back to normal,” he said.

Something that will likely be impacted – at least for a little while – is the agricultural sector’s workforce, as many farm workers come from Gaza, and the conflict may affect their ability to work. Additionally, some foreign workers have been taken hostage, which could lead to labor shortages.

Despite these challenges, Gitler expects that workers from abroad will likely continue to come, albeit possibly at higher wages. “Unfortunately the countries that these people come from, they’re so desperate for money that they’re going to come no matter what because they need to,” he said. “[Growers] will have to pay them more, but they’re going to come because they need money to feed their families.”

A $30 billion effort to save the shekel

On Monday morning, the Bank of Israel initiated a plan to sell up to $30 billion from its foreign currency reserves, marking a historic intervention to support the shekel during the ongoing conflict with Hamas in Gaza. This move comes as the shekel faces depreciation, and the dollar exchange rate approaches NIS 4 to the dollar. The bank’s goal is to curb exchange rate volatility and provide liquidity to the market, with a secondary option of up to $15 billion through SWAP mechanisms.

For the economic-averse in the room (this writer included), here’s what that means: the Bank of Israel, like many central banks, holds foreign currency reserves, including US dollars. These reserves are typically used for various purposes, such as stabilizing the exchange rate of the Israeli shekel.

When the Bank of Israel decides to sell some of its US dollar reserves, it essentially injects US dollars into the Israeli financial system. This increased supply of US dollars can influence the exchange rate between the dollar and the shekel.

The SWAP mechanisms mentioned in the bank’s plan refer to agreements where two parties exchange things like interest payments, currencies, or asset values over time. Golan Benita, head of the Bank of Israel’s Markets Department, emphasized the strength of the Israeli economy and its ability to recover. “We will use all the tools at our disposal in order to mitigate the effects of the security crisis,” he said.

Benita stated that this intervention was prompted by unprecedented security circumstances and aims to prevent market overreactions. “We are still at the beginning of the event, and it is difficult for us to assess where the security situation will take us and what the impact on the markets will be,” he said. “The impact on the markets is indeed sharp, but it has not reached extremes.”

While it’s too early to measure the program’s successfully, initial signs are promising. The dollar exchange rate currently hovers around NIS 3.92/$ with low volatility, a significant improvement from the NIS 4/$ level it touched in prior weeks. The Bank of Israel had previously observed a 10% shekel devaluation this year due to political uncertainty.

Just how bumpy is the road ahead?

There are many moving elements to keep track of in the current economic situation. The exchange rate, the stock market, and human resource shortages – not to mention what the government is planning in regard to budget allocations. It’s a pretty hefty challenge to draw conclusions on just where the economy is headed, this early.

With that in mind, one might contemplate the future of Israel’s economy in two parts.

In the short term, there are a few promising signs:

The stock market, while it has taken a blow, isn’t dropping like a stone and is showing some signs of recovery. Food supply within the country isn’t expected to be an issue once the initial shock to the country’s distribution infrastructure wears off. The exchange rate (while certainly in a bad spot objectively) is relatively decent, considering the circumstances.

There are, of course, a few concerning things to look out for. For one, how the government proceeds in regard to the allocation of funds in response to the war, which could cause trouble down the line. As well, the war will certainly impact the country’s productivity from a business perspective, considering that so many workers have been recruited for reserve duty and left a void that is likely hard to fill due to its size. The extent of these consequences will vary significantly based on factors like the size of the affected companies, the unique nature of their work, and the duration of the reservists’ deployment, but they constitute a serious challenge.

In the long term, Israel had plenty of challenges facing it even before the war on Saturday. The shekel has been losing value for weeks, the real estate market is rocky, and foreign investment – a key contributor to Israel’s economic success – has gradually declined during the year. While the chaos and kerfuffle of the last few days have taken priority in the general discourse, those underlying issues haven’t disappeared.

With luck, and a lot of effort, Israel will be able to navigate the turbulence directly ahead. The hope is that afterward, it will still have enough strength to resolve its deeper issues.