Israeli Businesses Grapple with Economic Challenges Amid Ongoing Conflict

The recent outbreak of hostilities between Israel and Hamas has had a profound impact on businesses in Israel, leading to disruptions and economic uncertainties.

One case that exemplifies this situation is that of Jeremy Welfeld, whose successful brewery and restaurant chain faced a dire predicament. Prior to the conflict, his brewery was producing 50,000 liters of beer per month, while his 14 restaurants across the country were attracting thousands of customers daily. However, since the hostilities began, these businesses have ground to a halt. The brewery is no longer producing, and 12 of the 14 restaurants have been forced to close.

The initial shock of the Hamas attack led to the closure of bars and restaurants and the cancellation of hundreds of flights. To compound matters, a massive mobilization of military reservists—about 360,000 in total—has left businesses that remain open struggling with a severe staff shortage. Rocket fire from Gaza, along with heightened tensions with Iran-backed Hezbollah militants in Lebanon, prompted the evacuation of large areas along Israel's northern and southern borders.

The repercussions of the war and regional tensions have been felt throughout Israeli markets. The blue-chip TA-35 index has declined by 9%, and the shekel's value has fallen below 4 to the dollar. Investors are increasingly concerned about a prolonged conflict and its significant economic costs. The cost of insuring Israeli government debt has also surged.

Economists fear that the economic fallout may surpass that of Israel's month-long confrontation with Hezbollah in 2006, potentially resulting in an economic contraction of up to 2% to 3% between the third and fourth quarters. The impact is widespread, affecting businesses across various sectors.

In particular, the services sector is under immense strain. Taxi drivers like Nina Mizrahi, who would typically complete 20-40 journeys a day, have seen their workload dwindle to just one journey a day, leaving them with severe financial challenges.

Tourism, a significant part of Israel's economy, is reeling as well. Just as the traditional October-December high season begins, fears of a retaliatory invasion of Gaza escalating into a regional conflict have led to numerous tour cancellations. This downturn in business is reminiscent of the setbacks faced during the COVID-19 pandemic. The Israel Tour Guides Association reports receiving cancellations for tours scheduled up to two years in advance.

In southern Israel, near Gaza, the impact of Hamas's assault is evident. Sderot, a town of 30,000 people, has seen over 90% of its population evacuated. Rows of shops remain closed, and traffic lights at intersections flash a permanent orange, giving the town the appearance of a ghost town.

Recognizing the likely scale of the economic impact, there have been growing calls for government assistance. The finance minister has unveiled plans to aid businesses affected by the crisis in covering their fixed costs, as well as providing financial assistance to workers who cannot get to work.

The central bank has also taken action by announcing it will sell up to $30 billion of dollar reserves to stabilize the shekel. These relief measures come at the cost of a rising government deficit, which could reach 3.5% this year, far exceeding the initial target of 1.1%. Economists predict a much larger shortfall in the following year.

Nevertheless, some experts believe that Israel's economic resilience and better financial footing will help the country withstand the challenges of the ongoing conflict. The lower debt-to-GDP ratio and significant foreign exchange reserves provide a stronger economic foundation.

Although Israel has experienced numerous wars throughout its history, its economy has demonstrated a remarkable ability to bounce back. Some businesses in the high-tech sector continue to operate amid the turmoil. Deals in the robust tech industry are still being made, reflecting the sector's strength and resilience.

Despite the uncertainties and challenges posed by the ongoing crisis, there remains a sense of resilience and determination among Israelis. Business leaders and entrepreneurs are looking ahead to a return to normalcy, recognizing the need for economic activity to continue despite the ongoing conflict. However, the ultimate duration and depth of the military operation will significantly influence the extent of the economic damage incurred.

By fLEXI tEAM