The Gaza Offensive and the economy

Since the Gaza offensive began on 27 December, there has been much rhetoric and media coverage about the possible effects of the offensive on the Israeli economy. If we look at periods of military conflict in the recent past, we can report that the effect of the 2nd Lebanon War in July-August 2006 on the economy was minimal – just a short-term slowdown on GDP growth and a surprisingly limited effect on incoming tourism. But all this may have been because at the time, the Israeli economy was in the midst of a rapid growth period.

At present, the economy is showing signs of significant slowdown, as part of the overall global slowdown/recession. Is it possible that the effect of the Gaza offensive will be heightened as a result of these different economic background conditions? Our answer to this is: no.

Firstly, on the assumption that the slowdown will continue during (at least the first half of) 2009, we will have no real way of isolating the effect of the offensive on the economy from the general trend of slower activity, resulting from the global crisis.

Secondly, there is consensus that the slowdown in the Israeli economy is lagging the global slowdown so the downward trend in economic activity in Israel still has a way to go, regardless of the possible effect of the Gaza offensive. Recent data indeed show how the economic situation in Israel is deteriorating. Revised estimates of GDP growth in 2008, published on 31 December, show a more severe slowdown than that shown by preliminary estimates, published in October – 4.1% compared to 4.5%. 3rd quarter GDP growth slowed to just 2.3% (these data were published in November and undoubtedly contributed to the revised annual growth estimates).

Consumer confidence in Israel took a steep dive in December. The Bank of Israel again lowered interest rates sharply at the end of December (in line with interest rate slashes by central banks around the world), as a way of contending with the worsening slowdown. Revised IMF growth forecasts for 2009, published in November, show the Israel economy growing at just 1.5%, compared to an earlier (October) forecast for Israeli growth of 2.8% in 2009.

All this is happening without the influence of the Gaza offensive, and it is unlikely that the offensive will add significantly to these downward trends. Could incoming tourism be affected by the offensive? Based on the experience of the 2nd Lebanon War, the effect – if at all - is likely to be limited. It is worth noting that incoming tourism increased significantly throughout 2008: if it begins receding in 2009, it is more likely that this will be the result of the global slowdown affecting tourism in general around the world, rather than the result of the Gaza offensive.

One possible cause for concern is the effect of the offensive on the Israeli budget deficit in 2009, given the decline in tax revenues (a major feature of 2008) as a result of the economic slowdown, which is expected to continue in 2009. While other countries have decided to increase budget deficits as a fiscal way of dealing with the global crisis, the Israeli government has for the moment withstood pressure to go down the same path. The possibility of increased defense expenditure as a result of the Gaza offensive may make this target more difficult to achieve, though most defense sector experts argue that the offensive will not call for any increase in the defense budget.

The effect of the Gaza offensive on the economy depends of course on how long the offensive will continue and at the present time, with the offensive having just begun, there is as yet no answer to this question. So we will most likely be reporting here on this subject in the months ahead.