A multi-front war, in which Israel is facing both Hezbollah and Iran, could have severe implications for the country’s economy, according to a report from Reichman University’s Aaron Institute for Economic Policy published late last month.
A full-blown war with Hezbollah would also have significant implications, the report said.
The report laid out two possible security scenarios, estimating the economic impact of each.
The first scenario is one in which high-intensity fighting continues on the northern front for around a month, including aerial attacks on southern Lebanon and IDF ground forces in Lebanon.
In this case, 2024 would see the economy contract by 3.1%, meaning that gross domestic product would shrink by around 5%, the report said. In this case, the deficit would climb to 9.2% of GDP and the debt-to-GDP ratio would be 71%.
In 2025, the report estimated growth of 1.7%, a deficit that is 7.8% of product and a debt-to-GDP ratio of 76%.
Interest on the debt could reach 6 to 8% in this case, the report estimated.
Assuming a total economic shutdown
In this scenario, the report assumes that the Hezbollah response is mostly focused on the northern part of the country but also impacts the center.
This scenario assumes that economic activity is shut down in the north, with 70% of employers impacted, due to the intensity of the fighting. It also assumes that there is damage to transportation and energy infrastructure that leads to powered outages, as well as damage to vital services and hospitals.
The report’s authors also assume that in this case, the situation in the West Bank is as it was in Q3, 2024.
This scenario also assumes that no agreement is reached with Hamas in Gaza, and so Israel controls militarily as well as administrates civilian matters, demanding an additional 20.000 reservists, costing NIS 7 billion per year.
The cost of fighting, in this case, is estimated at around NIS 120 billion.
The second scenario that the report looked at was one in which Israel is fighting in a multi-front war against Hezbollah and Iran. In this case, 2024 would see contraction of 4.8% which means a loss of around 7% of GDP, the report estimated.
The large expense of such a war would increase the deficit to 11.2% of GDP and the debt-to-GDP ratio to 74.5% in 2024.
In this case, in 2025, the economy is expected to grow 1.5%, the deficit would be 11.3% of product and the debt-to-GDP ratio would reach 82.5%, the report estimated.
This scenario is one of a high-intensity war in Israel’s north for around a month, which includes aerial attacks and IDF ground forces in Lebanon. In this scenario, Hezbollah launches rockets at the entire country, and Iran joins the fighting with sporadic missile attacks.
In this case, the combined attack shuts down Israel’s economy, and there is the risk of harm to vital infrastructure.
This scenario makes the same assumptions about the situation in Gaza and assumes that the situation in the West Bank deteriorates in comparison to Q3, 2024.
In this case, the majority of attacks from Iran are assumed to be intercepted, but attacks from Iran are still assumed to cause massive damage to vital infrastructure.
The cost of fighting, in this case, is estimated at around NIS 180 to 220 billion.
The report warned of the severity of the possible impacts on the economy, saying that a multi-front war that brings quick security and economic deterioration could cause panic and lead to a wave of withdrawal from Israeli savings accounts and to Israelis moving money to dollar accounts, weakening the shekel.
Stabilizing the market will require extreme steps for convergence and US guarantees, according to the report.
The report said that uncertainty surrounding the stability of the Israeli economy could significantly harm investment, especially in hi-tech, and create a significant risk of emigration of young people with personal wealth who will “choose to get away from security and economic risk, lacking trust in the leadership or the possibility of change.
Responsible economic policy would enable the country to handle the economic impacts of a war with Hezbollah, the report concluded, adding that a multi-front war that included Iran would create a significant risk to the economy, by bringing the deficit-to-GDP ratio to levels it is hard to recover from.
The report’s authors urged Israel’s central bank and government to take immediate steps to project stability, including adjusting the budget to the current economic realities.
