How could the Israel-Hamas conflict impact the domestic and global economy?

On October 7^th 2023, the latest escalation in the Israel-Hamas conflict began. Like most wars, this has had a profound impact not only on innocent civilians but also on the wider economy. Already many countries and investors are worried about the fallout from this conflict. Geopolitical^[i] uncertainty can lead to a collapse in consumer confidence leading to less economic activity and a potential recession.

How has the war impacted Israel?

As Israel is still reeling from the surprise attack, trade on the streets has completely collapsed. The initial conflict led to thousands of business closings and hundreds of cancelled flights. The few firms that remain open are likely to suffer from low demand and labour shortages. The Israeli government has mobilised a record 360,000 reservists which may leave some firms short on staff.

Tens of thousands of people have been displaced. Settlements near the Lebanon and Gaza borders have been evacuated leaving ghost towns behind.

Tourism has completely evaporated as many have cancelled their trips. The hospitality sector was already badly damaged by the Covid-19 pandemic and may shrink even further. In 2019, Israel saw a record 4.5 million visitors. The sector provided almost 150,000 jobs and accounted for 2.6% of Israel’s economy.

War can often have a severe impact on markets as uncertainty grips investors. The Israeli Shekel has fallen over 5% since the conflict began and the Israeli stock exchange is also down 9%. Stock markets across the Middle East also fell amid concerns of a wider regional conflict. The precarious geopolitical situation has meant many investors are more risk-averse. Many have thus flocked to safer assets such as gold.

A weaker currency makes imports more expensive and exports cheaper. This means consumers could suffer from higher cost-push inflation and less purchasing power whereas exporters may see no benefit as economic activity in Israel has suffered. Firms may find it harder to gather funds for investment due to low confidence. However, in the current climate, it is unlikely many firms would be looking to expand.

To support the shekel, the Israeli Central Bank has revealed a $45 billion package. It plans to sell off $30 billion of foreign reserves and provide $15 billion through currency swaps. The shekel has been performing poorly this year due to earlier efforts of the government to restrict the judiciary^[ii]. Finance Minister Bezalel Smotrich has created a financial aid package worth 4.5 billion shekels. This plan will reimburse businesses that are struggling with lower revenues and high costs. Money will also be given to people who cannot return to their jobs. Tax breaks have been given to relieve some pressure. VAT^[iii] payments have been deferred and the negative income tax programme has been expanded to include 300,000 more people. Negative income tax is a concept whereby the state guarantees money to low-income households first proposed by economist Milton Friedman. Smotrich also unveiled an 80 million shekel grant to displaced residents of communities close to the Gaza border.

These schemes will come at a large cost to the government with expenditure rising while tax revenue falls. It is estimated the war is costing Israel about 1 billion shekels a day. Smotrich has predicted the government’s budget deficit could reach 3.5% of GDP which is 2.2% above the previous target for 2023. Economists fear this figure could creep up to 7-8% of GDP in 2024. As a result, the S&P 500 global credit ratings agency has downgraded its credit outlook on Israel from stable to negative. The cost of insuring government debt has also surged worsening the budget deficit.

A persistent budget deficit could force austerity^[iv] measures in the future which damages living standards. In addition, the impact of Israel’s security failure on October 7^th is likely to lead to a huge rise in defence spending which could pile further debt.

Commodities^[v] tend to be highly price volatile. At the initial onset of the conflict, crude oil prices shot up before easing more recently. Gas markets have also reached an 8-month high. Higher energy costs may lead to severe inflation and a cost-of-living crisis. In 2022 Israel’s cost of living was the highest amongst OECD (Organisation for Economic Cooperation and Development) countries. Its price levels were 38% higher than the OECD average.

Housing costs and the price of everyday staples are becoming increasingly unaffordable for many. These conditions have led to social unrest with protestors calling for rent control and more social housing. Tel Aviv, Israel’s tech capital and 2^nd largest city, was ranked the most expensive city in the world by the Economist Intelligence Unit in 2021.

To put the inflationary burdens into perspective, the Yom Kippur War in 1973 prompted an oil embargo from OPEC (Organisation for Petroleum Exporting Countries) sending oil prices through the roof. Although the war only lasted a month, it had a devastating impact on the world. In Britain alone, the crisis led to energy rationing, unemployment and extreme inflation which peaked at 24.5%. Nevertheless, it must be noted that oil is no longer so important to the global economy as many countries are sourcing alternatives and energy efficiency has since improved.

Global financial bodies appear to be notably pessimistic. The IMF has warned of further global repercussions which include stubborn inflation^[vi] and a potential refugee crisis. The president of the World Bank warns the Israel-Hamas conflict can deal a “serious blow” to global economic development.

On the other hand, Israel does possess a robust economy driven by its technology, defence and diamond industries. Economic growth in 2023 is expected to be 2.3% which is below the target 3% growth rate but still avoids recession by a longshot.

How has the war impacted Palestine?

The Palestinian economy is already fragile and is set to face even more complications. Many Palestinians rely on international aid and remittances from family overseas. Israel has a strong grip on its economy. The shekel is the main currency used in Palestine and two-thirds of its tax revenue is even collected by Israeli authorities. These revenues are supposed to be transferred to Palestine but have been delayed or frozen. Many Palestinians in the West Bank also find employment in Israel.

War will have a significant impact on civilians and essential infrastructure across Palestine. Many Palestinians in Gaza are facing dire food, energy and water insecurity. Unemployment is also rampant. More than half of Gazans live in poverty. The United Nations Conference on Trade and Development reported that Gaza itself would need billions in international aid to recover from the war. The supply of humanitarian aid to Gaza isn’t always stable. Even before the war broke out, Gaza had been suffering from a 16-year blockade from Egypt and Israel.

After war broke out, the Israeli government announced a complete siege of Gaza cutting off electricity, water and aid. Subsequent international pressure forced Israel to reopen the Rafah corridor from Egypt with limited aid but critical fuel shipments are still not allowed to pass.

Due to the war, security crackdowns in the West Bank are likely to increase. This restricts movement which may make finding work harder for many Palestinians. It also doesn’t help that many Palestinian institutions are plagued by corruption. This makes many services inadequate and recovery even harder as funds are siphoned away.

Foreign funding is helping keep low-income households and some services afloat for now. For example, Qatar spends over $10 million a month to support 100,000 of Gaza’s poorest families and pays government workers such as teachers and doctors. Qatar also pays for some of Gaza's electricity. However, having an economy dependent on other nations is never desirable for anyone.

What will happen if the war intensifies?

Well, no one knows the answer for certain. At the moment, Israel is preparing a ground offensive into Gaza. Much of Gaza is an urban and densely populated area. Although the Israeli military outclasses Hamas’ fighters, urban warfare will be extremely bloody and difficult.

According to military analysts, Hamas fighters will be dressed as civilians making them difficult to identify. Also, Hamas may have weapons and equipment stored in civilian infrastructure such as schools and mosques. Hamas also has an extensive tunnel system underneath Gaza which one expert described as “Vietcong times 10”.

If the war drags out, both civilian and military casualties will rise. The impact of human loss will be devastating for both Israel and Palestine. Moreover, the financial toll could be hefty. Money will be needed to fund the military, reconstruction and compensate civilians.

Even Joe Biden has warned Israel to avoid the mistakes made by the USA after the 9/11 attacks. He urged Israel not to be “consumed” by rage. The USA after 9/11 poured decades and trillions of dollars into a fruitless war which has cost millions of lives.

There are never any winners in a war. Many innocent civilians have lost their lives and many more will suffer from economic fallout and distress. The history of this conflict is fraught with tragedy and violence. Numerous countries have already called for a ceasefire and a de-escalation to alleviate some of the suffering. For now, one can only naively hope a permanent resolution could be found where Israelis and Palestinians can peacefully coexist.

Footnotes:

[i] Geopolitical - political activity influenced by physical features of a country or area, or the study of how a country's size, position, etc.

[ii] Judiciary - the system of courts that deals with legal disputes/disagreements.

[iii] VAT - Value Added Tax, a tax on spending.

[iv] Austerity - a period of low public sector spending.

[v] Commodities - a good or material that is used in commerce to produce other goods and services.

[vi] Stubborn inflation - a persistent rise in the prices of goods and services which erodes the purchasing power of consumers and producers.

Bibliography:

Gaza has been blockaded for 16 years – here's what a 'complete siege' and invasion could mean for vital supplies (theconversation.com)

Hamas war could affect Israel’s economy (cnbc.com)

Israel-Hamas War: How a Wider Conflict Could Trigger a Surge in Oil Prices (foreignpolicy.com)

What is the Rafah crossing and why is it hard to get aid into Gaza? | GMA News Online (gmanetwork.com)