As Israel gradually emerges from its most prolonged conflict since its Independence War in 1948, the country’s economy is showing signs of recovery, albeit still limited. With the country closer than ever to the end of the war, its citizens are eager to return to their everyday lives and experience the economic revival reserved for victorious countries.
Considered pillars of the Israeli economy, the high-tech, med-tech, aviation, and defense industries grew during the war and are expected to continue this trend even after the end of the hostilities that started on Oct. 7, 2023. For example, Teva Pharmaceutical Industries' stocks surged 26% following the announcement of impressive remission rates results for a new drug that treats colitis and Crohn's disease. Teva's market position reflected the resilience and potential upswing of Israel's broader economic landscape in the post-war period.
According to Dr. Yannay Spitzer, an assistant professor specializing in economic history and applied microeconomics in the Department of Economics at the Hebrew University of Jerusalem, “The labor market is at full employment right now. In part, this is an artifact of the war itself, but there could be no better-starting point for quick recovery,” he told The Media Line.
Dr. Roby Nathanson, Macro Center for Political Economics director, justified this optimism to The Media Line. “Historically, Israel has experienced many short-term conflicts, such as those in the Gaza Strip, which usually lasted a few days, with the longest being Operation Protective Edge, which spanned 50 days. Our last prolonged war was in 2006 during the Second Lebanon War, which lasted about three months. On all occasions, Israel recovered very quickly, and the economic growth of the labor market and other components of the economy showed even better performance shortly after the war than even before the war,” Dr. Nathanson added.
Despite the duration of the current war, Israel’s economic indicators show resilience. “While the shekel did depreciate during the war, it has since strengthened. The budget deficit rose significantly to about 8% of GDP but hasn’t continued to increase. Some sectors, like tourism and restaurants, suffered significantly, especially in the north and south,” explained Dr. Nathanson. “However, others, such as military industries, high-tech sectors linked to defense, cyber technologies, optical technologies, and even aviation, experienced notable growth. Gas and other energy-related industries are performing well and continue to perform during the year. The key challenge for Israel is reviving sectors and regions that were heavily impacted, particularly the north, where around 100,000 businesses were affected. Remember that Israel has around 700,000 businesses,” he added.
Moderately optimistic, Joseph Gitler, the founder of Leket Israel, the country’s leading food security organization working extensively with farmers in areas affected by the war, explained to The Media Line that “in the short term, we'll see a minimal impact, but in the medium term, three to six months, especially the holidays such as Passover and the summer, we’ll see something. I think Hanukkah will be a test already, mostly local tourism. If things remain quiet, farming in areas hurt by the war will greatly recover,” he argued.
The war severely impacted sectors like agriculture, tourism, and services in Israel. Many farmers were forced to stop their activities because they were located close to Gaza or Lebanon. However, according to Gitler, if they are allowed to return, he expects to see “a rebound in farming. As farming returns, food prices will also go down. Leket is noticing that prices are starting to ease as they are 30% above the expected. This also has a huge impact on families with lower incomes and eventually helps them maintain a healthier life and spend less on medicine,” he said.
Still, even with an improved situation with fresh food costing less, economists believe that ending poverty in Israel requires strong budgetary measures that change the origins of poverty.
A dissenting opinion
In contrast to Dr. Nathanson and Dr. Spitzer, Prof. Esteban Klor, a senior researcher at the Institute for National Security Studies, isn’t so optimistic and sees structural problems limiting any post-war economic growth, mainly Israel’s national budget.
According to Prof. Klor, the recent budget created by Israeli Prime Minister Benjamin Netanyahu’s government will hurt the country. “I don't expect a quick economic recovery of Israel, even if the war ends, because the budget will not go back to the levels it had in 2023 before the war started. If we had an economic budget of 65 billion shekels [$18 billion] before the war, now we are close to 150 billion shekels [$41 billion]. I think the burden will remain high for the foreseeable future,” said Prof. Klor.
But even in the face of a controversial national budget, Dr. Nathanson still thinks the cessation of hostilities will allow people to return to their regular jobs and the government to spend less on defense. According to Dr. Nathanson, household consumption and investment in construction will give the market a sense of how activated the Israeli economy is.
“I am optimistic because of the sudden improvement in the security outlook. The degradation of Hezbollah, the collapse of the Assad regime, and the revealed inferiority of the Iranians could make a great difference: they remove the greatest source of short-term risk, which both reduces budgetary needs in the near future and the risk for a widening, protractive, and expensive war. This was unthinkable before this fall. Furthermore, the prospects for a quick recovery of the northern districts seem much more optimistic,” Dr. Nathanson argued.
Even with the overall sense that farming areas of Israel will provide an essential part of the economic revival in the country, Gitler offered a more pragmatic understanding of this economic sector in Israel. “Things are not immediate, and a lot depends on the specific farmer, their cycle, and what they've been able to do over the last 15 months. You have farmers in the North who have not been to their farms since October 7, 2023. Then you have the ‘Rambo farmers’ who were there most of the time despite all the risks.”
However, Prof. Klor warned that “unless the government changes priorities and focuses all of the economic resources on policies that will strengthen economic growth, I don't think that we will go back to where we were before the war started. We can think of this similarly to what happened after the 1973 war, when Israel increased the defense budget significantly, leading to the lost decade.”
Prof. Klor continued: “So whether we will experience a fast recovery or a crisis or a slow recovery will mostly depend on how the government manages to finance this burden and whether the government will enact different policies and priorities now that so many of our resources are going to the defense sector.”
Although Dr. Nathanson also sees the problems in how the government manages its budgetary priorities, he said that “the key question is whether the Ministry of Finance will follow suit and maintain reasonable budgetary boundaries. If spending is directed toward non-productive areas, it could hamper growth. Still, if the Bank of Israel maintains relatively high interest rates compared to other developed countries, it could restrict growth but ensure financial discipline.”
As Israel inches closer to ending the war with Hamas, more than 20% of Israel’s general population lives under poverty levels, including 25% of the Israeli children. Accompanied by years of budgets that don’t address this situation, these poverty levels are the result of an intergenerational poverty trap and not because of the war, according to Prof. Klor.
Considering that these poverty levels are concentrated in Ultra-Orthodox and Arab populations in Israel, he highlighted that “most of them didn’t study basic core subjects at school like math and English. Because of that, they also don’t fully participate in the labor force, and a substantial part of their income comes from government allowances.”
As the world prepares for Israel to return to a stable situation, major US airlines are considering resuming flights to the Jewish state. American Airlines, United Airlines, and Delta Air Lines had suspended operations due to safety concerns, but with the cessation of hostilities, these carriers are evaluating the possibility of reinstating their services, signaling a potential boost to Israel's tourism and business sectors.
Further ahead, Israel also hopes that peace will bring new ties with countries worldwide and in the Middle East, alongside economic benefits. As the world is eagerly anticipating a potential Abraham Accords between Israel and Saudi Arabia, Dr. Nathanson thinks that “if this materializes, it would be a tremendous opportunity for Israel. Economic cooperation with the moderate Sunni Arab world could revolutionize Israel's commerce, transportation, aviation, tourism, and energy sectors.”
However, according to Dr. Nathanson, “two major challenges remain: addressing Iran’s nuclear ambitions and finding a resolution to the Palestinian issue. These are critical for unlocking the full potential of such agreements, even if the war gradually slows down until it's over.”
Even in the face of all these issues, “From a budgetary perspective, the prospects of a costly, protracted attrition war, or worse, have already been made highly unlikely. Security expenses will undoubtedly be more significant than before October 7, 2023, but the worst eventualities have been eliminated,” said Dr. Spitzer.
“I believe that events thus far have already cleared the way for recovery, which, in the best scenario, means rapid catch-up growth during 2025 and 2026. It may not work as smoothly, but at least I cannot see a reason precluding it, even if the outcome in Gaza is inconclusive,” concluded Dr. Spitzer.