Israel’s economy defies growing threats
Hamas’ murderous attack on Israeli citizens, which has been met with ruthless retaliation, has been compared to the 1973 Yom Kippur War for its ferocity and element of surprise.
In terms of its economic and geopolitical impact, the conflict seems unlikely to have the same devastating impact on global output and inflation as the war 50 years ago.
Israel’s economy is now among the strongest in the Middle East and is well equipped to withstand a prolonged engagement even if 300,000 citizens remain mobilized.
Most importantly, it has better relations with several neighbors and in the Gulf. But an Iranian intervention, either directly or through its Hezbollah proxies on Israel’s northern borders, would raise the stakes.
The current Hamas-inspired conflagration is another uncertainty for a global economy burdened by debt and inflation following Russia’s attack on Ukraine and Covid.
High-tech: the Azrieli towers in Tel Aviv
The International Monetary Fund’s (IMF) new global economic outlook underscores the fragility of the recovery, with global output rising just 3 percent this year and a dismal 2.9 percent in 2024. It wouldn’t take much to lead the entire world into a recession.
New World Bank President Ajay Banga noted at the IMF-World Bank annual meetings in Marrakesh, Morocco, that the conflict was “more limited” in scope than the Ukraine war. He added grimly that if it “spread somehow, then it would become dangerous.”
For developed Western economies, the biggest threat would be some form of blockade in the Gulf, stopping or slowing shipments of oil and liquefied natural gas, or an Arab embargo.
The closure of the Strait of Hormuz and the embargo in 1973 destroyed Western prosperity and stability with massive inflation. He sent the British Labor government to the IMF for a bailout and virtually ensured Jimmy Carter’s defeat in the 1980 US presidential election amid a failure to resolve an energy and dollar crisis.
A lot has changed. The United States is energy self-sufficient. Israel has a tense peace with Egypt and Jordan and wealth-generating alliances in the United Arab Emirates. A peace and trade deal with now-dead Saudi Arabia appeared to be on the cards.
And Israel is no longer a young orphan state sustained by German reparations and American assistance. It is a high-tech economy that lost just 1.9 percent of its output during the pandemic, compared to 4.9 percent across the OECD.
It grew 8.6 percent in 2021 and 6.5 percent last year.
Thriving startups contributed to half of its exports last year and account for 15 percent of national output. It now has $200bn (£164bn) of cash reserves, which meant the Bank of Israel could enter the markets, spending £24.6bn of reserves to support the shekel and keep the system liquid. banking.
Fierce: Israeli soldiers during the Yom Kippur War in 1973
Israel’s debt-to-GDP ratio of 60 percent is something most European economies, including the UK, can only dream of.
Most surprisingly, it is also energy self-sufficient as a result of gas discoveries off its northern shores. It is deploying its technological skills to block Hamas funding by freezing cryptocurrency accounts used to request and receive donations. Qatar, a traditional provider of economic support to Gaza, may have to resort to planeloads of dollar bills for distribution.
IMF projections suggest that a 10 percent increase in oil prices, as a result of the conflict, would reduce international production by 0.15 percent and add 0.4 percent to inflation next year. An oil embargo or all-out war with Hezbollah and Iran would ruin those calculations and cause economic chaos.
Plans, presented at the G20 meeting in New Delhi, for a trade route between India, the Middle East and Europe passing through the Israeli port of Haifa are on hold. The war makes the prospect of a trade-driven global recovery increasingly remote.