In the rich tapestry of history, each nation unveils their unique narratives through defining moments that shape its identity and become its enduring legacy. For both Israel and the US, these moments were marked by terror.
The dark shadow of the 9/11 terrorist attack has shaped the American narrative since 2001. Similarly, the October 7 Hamas attack on Israel has left a scar that will have an everlasting effect on the Israelis.
While there is no doubt that such devastating events affect peoples’ thinking for decades to come, other effects, such as those on the country’s economy are often exaggerated. In fact, while Israel’s economy faced an initial shock following the terrorist attack, similarly to the US post-9/11, all signs, as well as historic evidence point to a fast recovery.
Given the magnitude of the October 7th attack, the parallels between the US and Israel’s economies in the aftermath of traumatic events is highly relevant. The immediate impact of the 9/11 attack was two-fold. On one hand, patriotic sentiment surged, with a 62% majority saying they had often felt patriotic as a result of the 9/11 attack.
On the other hand, the economy saw a contraction, with the annual GDP growth shrinking by 3% in the first four months of the attack. Yet, both of these changes were short-lived: the economy recovered a year later, while the ‘’9/11 effect’’ on public opinion wore off by 2005.
As we observe the effects of Hamas attacks on Israel, we see a similar effect on the economy. Between October and December of 2023, Israel’s GDP fell by 5% in annualized terms. Private spending dropped by 26.3%, exports fell by 18.3% and there had been a 67.8% slide in investment in fixed assets, especially in residential buildings.
Yet, despite the drop in GDP between October and December, Israel’s economy still grew by 2% for the full year – smaller than the expected 3.5%, but hardly an insurmountable crisis.
There are several sectors that have felt the greatest economic effects: construction, agriculture, and tourism. Importantly, these sectors experienced significant labor shortages, given that 360,000 people were called out of reserve for active duty, and hence, taken out of the workforce.
It is important to note that currently, the reservists are returning to work, and even though 8% of the workforce was mobilized, the economy did not contract, and only failed to grow at expected levels.
Yet another sector that is particularly important for Israel and was threatened by the loss of labor is the technology sector. With the field composing 18% of Israel’s GDP, the mobilization of young talent in roles that require hi-tech expertise was particularly difficult. About 10% of tech employees were drafted, with some companies losing as much as 30% of their workforce. The decrease in foreign investment similarly concerned the sector.
However, it is also the sector that we at the Key Elements Group believe will be the key to Israel’s economic rebound. Advising a strictly limited number of international sovereign clients as well as leading companies in finance, energy and infrastructure, we have learned from the majority of the clients in the financial sector that they are optimistic about a quick recovery. Vast investments have already been made in the areas such as artificial intelligence – a field in which Israel pioneers.
Once the market reaches equilibrium, we believe that we can expect to see an outpour of investments into the Israeli AI start-ups. Even more so, some in the industry think that the war will ultimately strengthen the sector as it will likely draw support from investors keen to help the country rebuild.
Ongoing war creates a need for accelerated innovation- which Israel excels at
Additionally, the war effort leaves room for optimism for the acceleration of innovation and technological developments. Since the beginning of the war, the IDF, which has always served as an incubator and technological accelerator, has been expediting its technological projects that would otherwise have taken years to develop.
The military is cooperating with hi-tech companies to develop breakthrough capabilities in that way, accelerating fields such as cybersecurity and AI. Investment in security innovation will also spill over to other fields such as fintech, digital health, and the agricultural sector, which will continue to grow in the following years.
Finally, the signs that the economic impact of the October 7th attack will be short-lived are already clear. For example, the shekel fell to about 4 NIS to the dollar during the attack, but has now recovered to 3.6, showing that the short-lived drop was largely caused by the initial shock of war.
Additionally, just last week Israel sold $8 billion of bonds to the global market, promoting investment in the country. The next year of 2025 seems to have an even more hopeful outlook with the economy expected to grow by 5%. Hence, the impact of the October 7th attack on Israel’s economy was that of a shock reaction from investors, rather than a long-term crisis, similarly as in the case of the US economy post-9/11. As we hope for a safe return of all hostages to Israel, we see a bright future – one that they deserve.
The writer is the founder and CEO of Key Elements Group. He is going to be a speaker at the Maariv/Walla Economic Summit 2024 on March 26, at the Carlton Tel Aviv Hotel.
