War depresses people, economy; strong shekel harmful

There were still some crowds shopping for the weekend at Jerusalem’s open-air market. People were looking for the perfect freshly baked challah or sizzling shwarma sold by one of the shuk’s many vendors. Even so, it felt different. The place lacked much of its usual vigor, a sign that the war in Gaza is depressing the people and the economy.

Predating the war and just as troublesome is an overvalued shekel which makes Israeli goods more expensive. Some experts contend the strong shekel is threatening to wreak havoc on export-reliant industries and damage the economy, apart from the effects of the war.

The Iron Dome defense system has so far protected Israel from most of the Hamas rocket fire, but the country’s economic front may be less insulated. As the conflict in Gaza escalates, Israel has been hit with troubling declines in projected economic growth, consumer spending, and tourism.

Experts temper the pessimism by noting that in the past, the Israeli economy has been resilient. If the current conflict is resolved quickly, there may be little cause for concern. On the other hand, a drawn out conflict in Gaza may cause investors to worry about the country’s stability and could cause long term damage to Israel’s reputation and position as a key player in the global economy.

“Our key concerns are the openness of the Israeli economy and our ability to be a key player in the global markets,” Zvi Eckstein, former deputy governor of the Bank of Israel and dean of the School of Economics at the Interdisciplinary Center (IDC) Herzliya, noted in an interview with The Times of Israel.

“It’s really still a key uncertainty how the conflict will end up,” said Eckstein. “Most people predict we will get back to the same relatively stable geopolitical situation as we were in in early July, and if so, I would say the economy would rebound back later next year. But if not, the threat to Israel’s economy would be quite devastating.”

A key measure of how investors view the stability of the Israeli economy is the value of the shekel. A strong currency generally indicates that investors view an investment in Israel as stable and reliable, while a weak currency indicates the opposite. Yet even as international concern over the conflict grows, the value of the shekel relative to both the dollar and the euro remains quite high, at 3.43 and 4.60, respectively.

According to Rafael Gozlan, chief economist at Israel Brokerage & Investment, this is because “the market in general looks at [the conflict] as a short term event.” Yossi Fraiman, CEO of the Prico Group Investment House, agrees. “There is no major effect on the economy, so there is no real reason why the [currency] value would go higher. If you look at the second Lebanon War (in 2006) and all past clashes with the Palestinians, you see that the exchange rate wasn’t really affected by the conflict.”

Naomi Hausman of the Hebrew University Department of Economics told The Times of Israel that the exchange rate could take a temporary hit due to reduced spending in the tourism sector and lower production of export goods. “In previous conflicts, Israel has suffered some productivity loss, and I imagine this conflict will be no exception,” said Hausman, “but it is not a long term and fundamental change that would affect expectations.”

However, a strong currency presents its own set of problems for the Israeli economy. A strong shekel makes Israeli goods more expensive for consumers, both locally and in the international market, which harms Israel’s export-heavy economy. According to Fraiman, this is “a major problem for the local exporters and traditional industries,” he told The Times of Israel. “It is very difficult for the high tech industry especially to compete internationally when the rate is so strong,” Fraiman said. “The productivity they show is quite high, which gives a kind of safety net, but in general, the exchange rate is a major problem,” Fraiman said.

Despite a series of recent actions by Israel’s central bank designed to control the value of the shekel, many economists remain concerned:

“The Bank of Israel,” Eckstein said, “faces a real problem” given the increase in both foreign investment and bond values, which strengthen the shekel. “As a result, the shekel may even get stronger, and therefore intervention is called for,” Eckstein concluded.