Israel's Macroeconomic Malfunction

 ISRAEL’S CONCURRENT MACROECONOMIC GEOPOLITICAL MALFUNCTION 

Introduction 

Israel's economy is a highly advanced free-market economy. Israel's advanced economy has made it possible for the nation to have a sophisticated welfare state, a formidable military that is rumored to be capable of deploying nuclear weapons and a full nuclear triad, modern infrastructure that rivals that of many Western nations, and a high-tech sector that is competitively on par with Silicon Valley. It boasts the third-highest number of NASDAQ-listed firms globally, behind the United States and China, and the second-highest number of startup companies globally after the United States. Israel was the location of the first international research and development centers established by US corporations, including Apple, Microsoft, and Intel. Over 400 advanced technology multinational companies, including Google, IBM, Hewlett-Packard, Cisco Systems, Facebook, and Motorola, have established research and development facilities across the nation.  

 

Fig 1: Israel’s World Ranking 

The Israeli economy faces a variety of short- and long-term problems despite its relative prosperity. Its short-term economic prospects are hampered by its inability to replicate its success in the telecommunications sector in other expanding industries. Its inability to produce significant multinational corporations during the past ten years raises concerns about its capacity to generate a sizable workforce in high-tech industries. Long-term problems for Israel include a high dependency ratio on the increasing number of Ultra-Orthodox Jews who participate in the labor force at a low official rate among men. This could eventually result in a materially lower employment-to-population ratio and a higher dependency ratio. Stanley Fischer, the governor of the Bank of Israel, said that the Israeli economy is being negatively impacted by the rising poverty among Ultra-Orthodox people.  

Present Condition  

After weeks of deadly bombings and naval bombardments in response to Hamas' offensive on October 7, the Israeli army began a military campaign in Gaza. In keeping with its pledge to demolish Hamas, Israel has murdered at least 13,000 Palestinians, including more than 5,500 children, and damaged or destroyed up to 51.4% of the buildings in northern Gaza. 

Yet, the devastating response and the probably protracted nature of the military operations have had a drastic economic impact, raising the possibility of a systemic risk to Israel because of the disruption of businesses, the slowdown of commerce, the cancellation of flights to the nation, and the cessation of tourism. 

Given that the war's result and duration are yet undetermined, and that Israel has already spent $260 million on the Gaza conflict, there is a lot of political and economic instability every day. 

Downfall Trend of Israel’s Economy- Causes 

Even prior to the attack done on Israel and its retaliation, the Israeli economy faced a major setback due to the covid-19 pandemic. The economy was shut, the growth stunted, and businesses taken a halt. Although the economy recovered from that. Terrorists from Hamas attacked Israel across borders in a way never seen before on October 7. They launched a well-planned, covert attack that destroyed the border fence in several locations, ambushed Israel's security apparatus, and overran the armed forces. The attackers, taken aback by the lack of opposition, escalated the operation into a violent and disorderly rampage into residential areas. The militants' capture of victims from an area spanning over 20 kilometers (about twice the height of Mount Everest) was indicative of the extensive reach of their infiltration beyond Gaza's border with southern Israel. Women and little children made up most of the prisoners that The Washington Post was able to identify. More than 260 dead were found at a dance festival three kilometers from the border fence. According to Israeli sources, the attack caused at least 32 U.S. citizens to die and 5,400 injuries. The goal of the attack, according to Hamas, a terrorist organization that has ruled the Gaza Strip since 2007, was “to free Palestinian prisoners, stop Israeli aggression on al-Aqsa Mosque, and to break the siege on Gaza.” The power imbalance and lack of action toward peace and Palestinian statehood have kept tensions smoldering. After severe protests in May 2021 over Israeli plans to evacuate Palestinian families from a neighborhood in favor of Jewish Israelis in East Jerusalem, Hamas fired missiles against Israeli cities. Israeli commandos raided Jerusalem's al-Aqsa Mosque, a revered Muslim monument, in April. At least 22 people were killed in Gaza and two in Israel during a five-day battle between Israel and Islamic Jihad, another armed Palestinian group, the following month. Up until late August, when Israel stopped issuing new work permits and prevented those who already had them from entering the nation, the Gaza Strip enjoyed a rare peaceful summer. Israel blamed Hamas for a series of attacks on Israeli residents in the West Bank.  

These causes and the consequent reactions between Israel and Hamas have left the Israeli economy abandoned and lead to some severe upcoming.  

Downfall Trend of Israel’s Economy- Consequences 

The Israel-Hamas war has been a recent advancement but before this the covid pandemic already impacted the economy of Israeli economy incorrigibly. The consequences were as follows: 

• ECONOMIC GROWTH 

1. 1. In comparison to the same period in 2019, the GDP decreased by 3% in the first three quarters of 2020. 

2. 2. The Bank of Israel predicts that the GDP will decrease by 4.5% to 5% in 2020. With a 1.9% annual rate of population growth, this means that GDP per capita might decline by as much as 6.9%, delaying Israel's progress by roughly six years. 

3. 3. The optimistic projection from the Bank of Israel states that GDP would increase by 6.5% in 2021, meaning that GDP will conclude 2021 5% lower than anticipated in the absence of the crisis.  

4. 4. Consumption fell along with the GDP, especially during the lockdowns: average daily total credit card spending indicated a fall in activity fell by 21% during the first closure in March and by a milder 10% during the second lockdown that started in September. 

5. 5. When broken down by industry, spending at petrol stations decreased by 21% and 49% during the first and second lockdowns, respectively. Spending was cut to one-third and 34% of its typical levels in the restaurant and hotel businesses, respectively, and to one-quarter and half of its typical levels in the leisure and hospitality sectors. During the first lockdown, spending increased by more than a third in grocery store chains.  

• UNEMPLOYMENT 

The coronavirus outbreak caused many Israelis to lose their jobs or be placed on unpaid leave; consequently, the definition of unemployment was adjusted to reflect the new situation. 

1. 1. In March, the first lockdown was implemented, putting almost a million Israelis on unpaid leave. 

2. The percentage of workers receiving unemployment insurance payments increased tenfold between 2. February and March, peaking at 22% of the working force in April. The number of people receiving unemployment insurance increased during the second lockdown, reaching 240,000 more recipients, after decreasing in between the lockdowns. 

• DEFICIT AND NATIONAL DEBT 

The crisis resulted in a sharp decline in tax income and a sharp rise in government spending, which raised the deficit. To address the situation, the government will need to raise the national debt. 

1. 1. The federal budget deficit in 2019 exceeded the annual target by a considerable margin, coming in at 3.7% of GDP. The cumulative deficit for the year had already reached 12% of GDP at the end of the third quarter of 2020, which is close to the Bank of Israel's prediction of 13%. 

2. 2. Prior to the crisis, Israel's debt-to-GDP ratio was over 60%. The Bank of America projects that in 2021, the debt-to-GDP ratio will be 76% due to the rise in the deficit and the decline in GDP. 83% based on Israel's gloomy prognosis and 8% based on its optimistic forecast.  

The government of Israel decided to respond to the crisis in such a manner: 

1. 1. By the end of November, the government's economic plan to address the 2020 crisis came to a total of approximately NIS 139 billion, or almost 10% of the 2019 GDP. 

2. 2. The Ministry of Health and other ministries handling the crisis received over NIS 16 billion in funding; by the end of November, 93% of that amount had been used. 

3. 3. Only 77% of the NIS 52 billion allotted for the social security net's growth has been used. 

4. Sixty-seven percent of the NIS 66 billion allotted for business continuity programs—which include support for businesses—has been used. 

5. 4. Just 40% of the NIS 4.6 billion allotted to a program for the growth and acceleration of the economy has been used. During the months of March through November in 2020, the economic program was used 73% of the time overall. 

6. 5. Israel's overall support policies, which mostly entail direct fiscal stimulus, are on par with or sometimes considerably larger than those of other OECD nations. In comparison to other nations, Israel has far smaller tax deferral and guarantee programs for the business sector, which could provide a challenge to the country's economic recovery. 

Fig 2: The drop of GDP of Israel during Covid-19 years (2019 and 2020)  

The war of Israel- Hamas and Gaza advancements also made it difficult for Israeli economy to stay stable for a permanent tenure. The war has led to the following impact.  

1. A. Labor Shortages 

The labor market has experienced a significant supply shock in Israel's industrial sector, primarily because of tightening limitations on staff availability and mobility. 

In addition to its 150,000-strong active military force, the army has mobilized an additional 360,000 reservists, or around 8% of Israel's workforce, for the battle in Gaza. This is one of the biggest military mobilizations in the history of the region. 

Since Israelis over the age of 18 are still required to serve in the military, hundreds of workers are quitting their regular employment to join the front lines. One such division is the 252nd Sinai Division, where the Israeli army reports a 120% reservist turnout rate. 

even when companies receive payment for the benefits from the National Insurance Institute employers' fee is still equivalent to the opportunity cost of workers' direct production contribution and declining labor productivity when it comes to wages given to employees called up to the reserves. 

2. B. Drop in demand and Consumption 

The absorption of both local and imported production is being hampered by an external shock on the aggregate demand side. A decline in household disposable income and a slump in private consumption of goods and services are the results of this. The ongoing inflationary pressures in Israel have made this decrease in consumption worse, and the extraordinary acceleration in the devaluation of the Shekel/US Dollar exchange rate since October 9th has made it much more noticeable. 

The absorption of both local and imported production is being hampered by an external shock on the aggregate demand side. A decline in household disposable income and a slump in private consumption of goods and services are the results of this. The ongoing inflationary pressures in Israel have made this decrease in consumption worse, and the extraordinary acceleration in the devaluation of the Shekel/US Dollar exchange rate since October 9th has made it much more noticeable. 

Apart from a decrease in services and consumption and a scarcity of labor, Israel's technology industry has been most affected. Economists estimate that 10% of Israeli workers are employed in the high-tech industry, which accounts for 50% of the nation's exports. Many of the youthful, intelligent, and productive reservists were called up for duty.  

According to some Israeli experts, if the conflict continues for a year, the combined costs might amount to 10% of the country's GDP, indicating that the dual economic shock on supply and demand could cause an unprecedented macroeconomic disaster for Israel. The head of Israel's central bank stated earlier this month that the conflict was more costly than anticipated and a "major shock" to the economy. 

The most recent news from December 2023 states that while the ranges are different, the growth estimates for the next year are lower than those from earlier estimates. Some economists predicted that the economy may expand by just 0.5%.  

Fig 3: Latest macroeconomic development to happen in Israel.