War with Hamas to cost Israel at least NIS 27 billion، Bank Hapoalim projects

The cost of the war between Israel and the Hamas group is estimated to be at least NIS 27 billion ($6.8 billion) as of now، according to initial projections by Bank Hapoalim.

That takes into account the significant and massive call of 300،000reserve soldiers who must leave their jobs — the largest mobilization since the 1973 Yom Kippur War، when Israel called up 400،000 reservists — restoration of infrastructure، housing and parts of the army، the expectation of a long campaign، and multiyear costs of rehabilitating disabled soldiers and caring for the families of fallen soldiers.

“As of the present time، it is very difficult to know how the war will develop – whether it will trigger a ground campaign to conquer parts of Gaza that will take many weeks، or whether a campaign will also be launched in the north and how long the reservists be called up for duty،” said Bank Hapoalim chief strategist Modi Shafrir. “At present time it can be assumed (in a very rough estimate) that the costs of the current war will amount to at least 1.5% of GDP، which means an increase in the budget deficit of at least 1.5% of GDP in the coming year.”

The projection by Bank Hapoalim is partly based on the costs during previous wars Israel has fought. The expenses of the Second Lebanon War in 2006، which lasted 34 days، were estimated at NIS 9.4 billion ($2.4 billion)، or 1.3% of GDP،accordingto the Institute for National Security Studies (INSS). The cost of Operation Cast Lead from December 2008 to January 2009 was estimated at NIS 3.3 billion ($835 million).

Israel’s past wars، such as the 2006 Second Lebanon War، paralyzed part of the country due to rocket barrages، but did not last as long to completely shut down the entire economy. After missiles stopped and troops، reservists came back home، the country’s economy in the post-war period managed to bounce back and recover relatively quickly.

“Past experience shows that the impact of the war on GDP is expected to be felt mainly in private consumption and tourism figures but the very large mobilization of the reserve forces and the assessment that the current war will last many weeks، are expected to incur more direct damage to Israel’s economy compared to previous combat operation rounds،” said Shafrir.

Since the surprise assault by the Hamas on Saturday، in which the terrorists swept through communities in southern Israel massacring hundreds of civilians، and Israel subsequently declared a state of war، local stocks and bonds fell، and many businesses and schools in the country remain closed، while airlines have stopped most flights to Tel Aviv. Israel’s central bank said this week that it willsellup to $30 billion in foreign exchange to prop up the shekel and prevent its collapse. Despite the central bank’s announcement، the local currency has weakened more than 2% over the past two days and is trading around NIS 3.95 per US dollar.

On Tuesday، the International Monetary Fund (IMF) warned that the world economy faces new uncertainty fromthe war between Israel and Hamas militants and could see fallout from the Middle East conflict — particularly to oil prices.

A disruption in production

The IMF said it expects global economic growth to slow to 2.9% in 2024 from an expected 3% this year. The forecast for next year is down a notch from the 3% it predicted back in July. That’s as the world has yet to fully recover from a short-lived COVID-19 recession and is reeling from the impact of higher interest rates and the invasion of Ukraine.

It’s “too early” to assess the impact on global economic growth from the days-old war between Israel and Hamas، IMF chief economist Pierre-Olivier Gourinchas said at a news conference. He said the IMF was “monitoring the situation closely” and noted that oil prices have risen by about 4% in the past several days.

“We’ve seen that in previous crises and previous conflicts. And of course، this reflects the potential risk that there could be disruption either in production or transport of oil in the region،” he said.

As Prime Minister Benjamin Netanyahu already cautioned to expect a prolonged and difficult war until the government’s objectives are reached، the country’s economy، although still fairly robust، is on a downward growth trend.

A slowdown in investments

Since the start of the year، the advancement of the contentious judicial overhaul has led to a slowdown in investments into the high-tech sector، the country’s main growth engine، and a weakening of the shekel exchange rate. High interest rates hikes، rising inflation and expectations of a slowdown in the global economy are also weighing on local growth.

Before the outbreak of the war، the Bank of Israel saw the economy growing at a rate of 3% in each of the years 2023 and 2024، after it expanded by more than 6% last year.

In August، Israel’s fiscal deficitwidenedto 1.3% of GDP، or NIS 23.1 billion ($6 billion)، over the prior 12 months، as state revenue from taxes continued to slide and government expenditure increased. The deficit has swelled above the government’s fiscal deficit target for this year of around 1.1% as the governmentapprovedthe allocation of billions of shekels in state funds to meet Haredi coalition demands.

More government spending will now be needed for the military campaign، which could mean that additional funds will have to be borrowed in a high interest rate environment and taxes could be raised، weighing on the economy.