A year after 7 October 2023 sparked a war that has metastasized into a multi-front confrontation, the Israeli economy has faced multiple difficulties and crises. These have stemmed both from the security and military shock of 7 October and from the Israeli government’s response to the demands of the war effort, with impacts extending to all sectors. This paper analyses the key repercussions for the Israeli economy.
From Military Shock to Economic Bombshell
Following the operations and during the early weeks of Israel’s aggression against the Gaza Strip, the Israeli economy’s vital indicators began to deteriorate rapidly, causing concern among officials, observers of the country’s economic affairs, and the Israeli public in general. Within days, the central bank was forced to allocate $30 billion from its foreign currency reserves to meet growing demand, as fears mounted over the effects of the military operation and its repercussions for the Israeli economy and even the future of the state. The Bank of Israel’s intervention did not however prevent the Israeli shekel (ILS) from falling to its lowest level against the dollar in eight years.[1]
Similarly, the Israeli stock market lost around nine per cent of its value during the first week of the operation, its largest drop in ten years. The bloodletting continued over the following two weeks, as spooked foreign investors fled and the index plunged by more than 22 per cent from its rate on 6 October.[2] Banks were the biggest losers in terms of market value, losing around 20 per cent – their biggest loss since the COVID-19 pandemic.
The shocks to Israel’s currency and its financial market were natural reactions to the challenges posed by the Hamas operations, as well to as doubts over Israel’s ability to bounce back and uncertainty about the outcome of the war and the future of the state. The Israeli economy was now also faced with more fundamental challenges that have significantly impacted its performance. In the fourth quarter of 2023, Gross Domestic Product fell by 5.8 per cent compared to the previous quarter, and by four per cent compared to the same quarter of 2022,[3] also the largest contraction since the pandemic.[4] This was a natural consequence of deepening uncertainty and fear among households and businesses. As a result, consumer spending fell by 26.9 per cent and investment by 67.8 per cent, exports fell by 18.3 per cent, and imports saw an even steeper decline, estimated as high as 42 per cent.
These negative indicators also coincided with significant supply-side constraints, perhaps most notably the suspension of work permits for more than 160,000 Palestinian workers, the majority of whom were employed in the construction, agriculture, and tourism sectors,[5] and the callup of some 360,000 army reservists, most of whom were employed in key activities such as the high-tech sector, financial services, Artificial Intelligence, pharmaceuticals, and agriculture,[6] which have been the main engines of growth for the Israeli economy over the past few years.
[1] Arab Centre for Research and Policy Studies,
Implications of ‘Al-Aqsa Flood’ on the Israeli Economy: High Costs and Future Prospects, Situation Assessment, 30/10/2023, (in Arabic) at: https://www.dohainstitute.org/ar/PoliticalStudies/Pages/operation-al-aqsa-flood-impact-on-israel-economy-heavy-costs-and-a-grim-outlook.aspx.
[2]CNBC, “Tel Aviv Stock Exchange Ltd,” accessed on 1/10/2024, at:
https://acr.ps/1L9zOiW.
[3] The Israeli economy is estimated to have shrunk by around 19.3 percent on a seasonally adjusted basis. See: “Israel: Economy Records Sharpest Contraction since Q2 2020 in Q4,”
Focus Economics, 19/2/2024, accessed on 5/10/2024, at:
https://acr.ps/1L9zOpb.
[4] Doloresz Katanich, “Israel-Hamas War Takes its Toll on Israel's Economy,”
Euronews, 19/2/2024, accessed on 1/10/2024, at:
https://acr.ps/1L9zOSc.
[5] Tawil, Bassam, “Israel Gave Work Permits, While Palestinians Planned Oct. 7 Massacre,”
Gatestone Institute, 18 June, 2024, at: https://www.gatestoneinstitute.org/20709/israel-work-permits-palestinians.
[6] Giorgio Cafiero, “Has the War on Gaza Hurt Israel’s Economy?”
Al Jazeera, 27/1/2024, accessed on 1/10/2024, at:
https://acr.ps/1L9zOwQ.
