War is supposed to be “good” for the economy, according to some experts, by boosting government spending — but that hasn’t happened in Israel’s conflict with Hamas in Gaza. The travel industry is in a shambles, tourism’s summer high season is ruined, and much-needed work isn’t getting done because 50,000 reserve soldiers, most of them members of the workforce, are otherwise occupied on the front lines. This is in addition to the expense of the war itself.
It was inevitable that the war would have an impact on the economy, according to Psagot Investment House. In its report, the group put the cost of the war at a quarter of a percent of what had been an expected 2.9% growth in GDP for 2014. Taking into account the losses to business, the expenses the government is facing, and the cost of repairing the economic damage, the report bumps down the expected growth rate for Israel for the year to 2.4% – taking into account the possibility that the war will last for another week and a half. If it goes longer, Psagot said, it may have to revise its figures again.
Even so, Psagot predicted the losses would be temporary.
The group made its assessment on the basis of another “summer war” — the Second Lebanon War, which took place during July and August of 2006. The war also hurt tourism and required extensive resources to repair buildings that were damaged by Hezbollah rockets. Iron Dome, which has speared lives and property this time by intercepting incoming rockets, had not been invented yet. While far fewer buildings have been damaged in the current war, Psagot said, that “gain” is wiped out by the fact that life in many more cities in the center of the country are being affected in many ways by Hamas rockets. Hezbollah was unable to reach farther south than Hadera, while Hamas rockets have hit Tel Aviv and well to the north.
Besides tourism, the report said, the service sector has been badly affected by the war. “Personal consumption is down significantly, but the service sector will be more affected long-term than the retail sector,” the report said. “Families and individuals are putting off discretionary purchases, but at the end of the war, retail purchasing is likely to bounce back as people release a pent-up desire to spend,” the report said. “However, spending on services is usually stable and does not increase after a period in which it was depressed. People may buy two shirts to make up for lack of purchases during the war, but they will probably not go to two movies.” By the end of the war, Psagot expects personal spending to be down by as much as NIS 1.7 billion (about $500 million).
Tourism, of course, has been badly hurt by the war, and unlike personal spending, tourism losses are likely to persist long after the fighting ends. “It’s likely that tourists will need some time to feel that getting a taste of Israeli falafel is worth the risk of traveling here,” the report said. Losses to the travel industry are likely to reach NIS 3.5 billion ($1 billion), the report said.
One bright spot, at least as far as spending goes, is in public consumption, the report said. The government will be paying the salaries of some 50,000 reserve troops for at least a month, as well as transferring compensation payments to businesses and individuals affected by the war. In addition, the IDF will need to spend more money than it expected in order to acquire replacements for the equipment and materiel used in the war effort. That, along with outlays for personnel expenses, is likely to boost government spending by NIS 2.6 billion ($760 million). Generally, exceptional government expenses are paid for by taxes, budget cuts, or both, but the report did not speculate about where the government would get the money it needs.
One economic beneficiary of the war is the supermarket, selling more food as Israelis “nest,” staying at home near their safe rooms instead going out and spending money at malls, restaurants and movies.
Adding up the numbers, Psagot said, Israel is likely to expend NIS 2.6 billion, or 0.25% of its GDP, on the war. While the sum is not insignificant, it concluded, the losses were likely to be temporary, and the country’s growth in the 12-18 months after the war should make up for any losses.