The Financial Times report on the fall of Israel’s economy in the fourth quarter was briefly the lead story and was oddly shuffled quickly off the landing page. The article gives a terse but incomplete tally of the factors that contributed to a decline at a 20% rate in the final quarter, which was markedly worse than most experts expected. Note by contrast that John Helmer was posting on the wide-ranging damage of the conflict on Israel’s economy. His sense of how badly things were faring seems to have been more on target than economists anticipated.
As we’ll soon examine (and informed reader comment encouraged), many of these adverse conditions are likely to stay in place and get worse as the war drags on; others were only starting to take hold in this measurement period. Thus it is reasonable to expect another big decline in the first quarter, even if not necessarily this large.1
Mind you, as we’ll address in due course, not only is the GDP decline set to continue merely based on current pressures continuing and in some cases intensifying, but as we warned, Israel looks to be escalating into a full bore campaign into Lebanon, to try to push citizens there from their homes back to the Litani River. Hezbollah warned it won’t let that happen and most military experts believe that Hezbollah can make that stick.
On top of that, Scott Ritter has pointed out that Hezbollah learned from the Israel 2006 invasion, which it eventually did beat back, that letting a war occur on your territory is a bad idea, and that if Israel attacks, Hezbollah will quickly take the battle into Israel and is set to take Galilee.
Key sections from the Financial Times account:
GDP declined by an annualised 19.4 per cent compared with the third quarter. On a pure quarter-by-quarter basis, the economy contracted 5.2 per cent compared with the previous three months.
The sharp drop was caused in part by the call-up of 300,000 reservists, who had to leave behind their workplaces and businesses to embark on months of army service, the Central Bureau of Statistics said.
Other factors to hit the economy included the government’s sponsorship of housing for more than 120,000 Israelis evacuated from the northern and southern border areas of the country.
Yves here. To interject, the claim that additional government spending on temporary housing would be GDP-depressing is incoherent. I assume the issue is that the economic activity of these communities went to zero, and the extra housing spending was much less than a full offset.
Back to the highlights from the story:
Following the October 7 attack, Israel also imposed tough restrictions on the movement of Palestinian workers from the West Bank into the country. The move hit the construction sector, causing labour shortages that became an additional drag on economic growth, the bureau said.
The war has triggered a steep increase in government spending, which rose 88 per cent in the three months after the outbreak of war compared with the preceding quarter. Consumers, meanwhile, were spending 27 per cent less.
Imports of goods and services fell 42 per cent, the report said, while exports dropped 18 per cent.
The piece also mentions the Moody’s downgrade earlier this month, which was fiercely criticized by Israeli officials. The GDP release confirms it was entirely warranted.
Consider additional negatives omitted from this recap:
Nearly 500,000 citizens left Israel by December 2023, out of a total population of 9 million. One has to assume this group skewed affluent. People without means can’t readily move to another country on a temporary or long-term basis. Even if one has a dual passport and accommodating relatives, these exiles would presumably have to live independently in their new locale at some point. From Anadolu Agency on December 7:
Nearly half a million Israelis have left the country since the outbreak of the Gaza conflict on Oct. 7, according to a local newspaper on Thursday.
The Population and Immigration Authority estimates that 370,000 people left Israel in the past two months, including 230,309 in October and 139,839 in November, Zman magazine said.
According to the magazine, approximately 600,000 Israelis traveled abroad for vacation before the outbreak of the Gaza war, while nearly 370,000 others departed after the conflict.
Nearly 301,982 Israelis returned to Israel in October and 194,016 in November.
“The figures show that the number of Israelis who left and did not return is estimated at around 470,000,” Zman said.
“Therefore, there is a negative migration of about half a million people, and this does not include thousands of foreign workers, refugees, and diplomats who left the country,” it added.
The article also pointed out that immigration had fallen by over 70%.
Admittedly this group could include techies who in theory could return…but would they? Like work from home, if they had successfully set themselves up with their employers/clients to operate from a different locale, it’s not clear they would want to return until the war was clearly over and they could assess how attractive it was to go back. And this cohort probably includes some liberals who are not on board with the Palestinian extermination project.
Effect of Houthi attacks on shipping. Recall that the Houthis are seeking to blockade Israel ports, among other aims. That means choking both imports and exports. Even though the Houthis started their campaign on October 19, my impression is that the attacks did not immediately pose a serious threat, but that by mid-November, both insurers and shipping lines were wrestling with what to do. The announcement of Operation Prosperity Guardian, on December 18, and it quickly proving to be ineffective (actually arguably counterproductive since confirming the Red Sea as a war zone would further alarm carriers and insurers) confirmed the Houthi operation had had a big effect, and not just in the region.
In other words, a crude look at the shipping industry’s reaction to the Houthi initiative suggests that Israel was not feeling its full effects for all of the fourth quarter. So unless there is a miraculous turn of events in early 2024 (and we have yet to see one), an additional GDP decline for the first quarter is baked in due to Israel bearing the full impact of the Houthi shipping strangulation.
Fall in tourism. The European Commission estimated tourism, strictly defined, to account for 2.8% of Israel’s GDP, but including its secondary effects, to contribute nearly 6% of GDP. That activity has to be in free fall. One offset is that settlers who were evacuated from the Lebanon border area are being housed at government expense, one assumes in way-under-capacity hotels.
Loss of demand from Gaza. Gaza’s GDP fell an estimated 24% in 2023, which would have reduced demand at least somewhat in Israel. The Financial Times and other sources, such as a January AlJazeeera story, focus on the immediate effect of the loss of Palestinian labor, which was important in the construction sector. Gaza’s GDP was an estimated $27.8 billion versus $500 billion for Israel. But Gaza is supplied close to entirely by Israel, so at the margin, the loss of its demand would have a measurable, if not large, impact on Israel GDP.
Some observers contend that Israel’s economy is so small that the US could keep it on permanent life support if needed. What cheery views like this miss is that the longer the war goes on, the more permanent the damage to the productive capacity of the economy becomes. Businesses that are shuttered more than a little while do not come back. If nothing else, the employees have to find other ways to live. Anyone in real estate will tell you vacant homes decay quickly, and I trust the same is true of commercial properties (that seems to be the case where I am now, which has tourism as a big but not sole driver of the local economy; the buildings who lost their tenants during Covid look so shabby as to be tear-downs).
In other words, what happens if Israel’s future is to become Gaza-lite, effectively dependent on foreign welfare?
To return briefly to Israel launching a big operation into Lebanon, Alastair Crooke has been warning that this was a given for some time, that Israel was determined to clear Hezbollah, as in the Lebanese population, from the border area with Israel so that the settlers who were evacuated felt comfortable about returning. In his latest Judge Napolitano interview, yesterday, Larry Johnson said his contacts confirmed that an Israel invasion of Lebanon was imminent.
Events seem to be quickly proving Johnson to be correct. An marked increase in Israeli bombings of Lebanon looks like a softening-up operation:
A report in the Irish Times show that Israel claims that one of the strikes was on Hezbollah munitions storage, while Lebanon said it was a tire factory.
Crooke had contended that housing the settlers elsewhere is not sustainable (he may mean politically as opposed to economically). He has also argued repeatedly that an overarching objective of Israel is to restore its sense of security, and that means cowing its neighbors with its military might.
But what is missing from this calculation is that what has held back Arab and Muslim states from mixing it up is that Palestine and Israel is an internal affair. I doubt anyone would read the Genocide Convention as providing a basis for armed intervention.
And if anyone were so bold as to try to intervene, the logistics are not favorable. By contrast, Donbass is on Russia’s border, and most wags forget that the 2014 civil war did become Russia’s problem by virtue of it taking in 1 million refugees (this per the UN). That is before getting to the wee matter of the security threat.
Ritter has warned that a bare-knuckle fight with Hezbollah would go badly for Israel and could even threaten the survival of the state, at least along current lines. Crooke has cited discussions, presumably in the Hebrew press, of misgivings that the IDF is not up to a hot conflict with Lebanon. But the right wing is determined to advance its vision of seizing Biblical Israel, which extends beyond Israel’s current territory, while it thinks the time is propitious. And the rest of the population seems to be so seized with anti-Muslim blood lust as to be willing to go along for the ride.
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1 This is before getting to reporting/computation games so as not to spook the Confidence Fairy any more than necessary, so if anything, even this result could be flattering. For example, in the 2008 financial crisis, the US “advance estimate” of the fourth quarter GDP decline was 3.8%. The final print was a decline of 8.5%.