If you paid careful attention, you may have noticed that on Monday the Central Bureau of Statistics reported that the Israeli economy shrank more than 19 percent in the fourth quarter, a stunning drop and bigger than many analysts had expected.
But you may not have noticed it because the news registered barely a blip on the media and financial market screens. It wasn't a headline story anywhere, and the market reaction was almost undetectable: the Tel Aviv Stock Exchange rose and the shekel barely moved.
It seems that people regard the fourth-quarter contraction as something out of the pages of a history book – that was then, when Israel was in the throes of a major war; this is now, when the reservists are back, rockets from Gaza are rare and economic life is pretty much back to normal.
In fact, the headline figure of a 19.4 percent drop in gross domestic product was a little misleading about how bad things were in the fourth quarter. The Central Bureau of Statistics reports quarterly GDP figures on an annualized basis, that is, as if the trends of the reported period were stretched out over an entire year.
Ordinarily, that is a fair way to present the data. But a typical quarter doesn't experience a traumatic massacre, rocket barrages showering the country, mass evacuations of civilians and hundreds of thousands reservists being called away from their jobs to fight a war.
A better way to look at what happened is to note that the economy shrunk in the fourth quarter from the third by 5.2 percent. And even with that end-of-the-year drop, for all of 2023, GDP was up a reasonable 2 percent (although after counting for population growth, the per capita figure was down 0.1 percent).
Given the rebound in economic activity reported for this year's first quarter, is fourth-quarter 2023 really something for the history books? The short answer is probably yes, but there is a very good chance that it will be no. This year may see a repeat of the fourth-quarter 2023, and if so, the economic contraction will almost certainly be greater and longer.
Even if Prime Minister Benjamin Netanyahu makes good on his threat to pursue the war against Hamas until Israel can proclaim "total victory" and orders the army into Rafah, it is safe to assume that as far as the economy is concerned the Gaza war is indeed history. The conflict, however, with Hezbollah is another story.
It appears that Hezbollah and its Iranian patron aren't anxious to engage in a full-fledged war with Israel, but they are willing to keep tensions high and more worryingly have expressed no interest in a diplomatic solution that would remove Hezbollah forces from the border with Israel.
A war with Hezbollah would be many times more devastating than the one with Hamas. A study by Reichman University's International Institute for Counter-Terrorism– the work of more than 100 defense experts – predicts that Hezbollah will launch 2,500 to 3,000 rockets every day, at least in the early stage of the fighting. Its rocket arsenal is many times bigger than Hamas' and contains precision-guided munitions and low-signature arms, such as loitering munitions, drones and standoff missiles. Israeli air defenses will be at risk of being overwhelmed as cities, army facilities and critical infrastructure come under sustained fire. Hezbollah fighters may cross the border into Israel.
Even if Israel responds in kind with a devastating attack on Lebanon, it is reasonable to assume that Hezbollah won't call off the war immediately. The Reichmann study assumes the rocket attacks will last about three weeks.
The working assumption right now in Israel is that such a scenario is unlikely, but when Moody's lowered Israel's credit rating earlier this month, it wasn't so sanguine. "The risk of an escalation involving Hezbollah in the north of Israel remains, which would have a potentially much more negative impact on the economy than currently assumed under Moody's baseline scenario," it warned.
But, assuming for now that cooler heads prevail, and war with Hezbollah is avoided, how is 2024 shaping up for the Israeli economy? The consensus view is that it will be a year of tepid recovery and then in 2025 enjoy a more serious rebound. The Bank of Israel, for one, is forecasting 2 percent growth in 2024 and 5 percent in 2025.
In fact, the Israel economy's reputation for bouncing back from war was already in evidence even during the 2023 fourth quarter and even more so in the first few weeks of 2024. The broad unemployment figure (which includes workers put on unpaid leave) dropped in January to 6.3 percent from 10.4 percent in October. Retail sales rebounded in December. The shekel has gained more than 11 percent from its worst war-time level.
But the effects of the Gaza war remain with us, even as the actual fighting is winding down.
Together we will be ripped apart
Both the building and agriculture sectors are facing severe labor shortages because the cabinet has refused to allow the West Bank Palestinians to return to their jobs in Israel. In the building sector alone, that amounts to some 90,000 workers, or about a third of the total labor force. Close to half of all construction has ground to a halt. In the farm sector, another 10,000-20,000 Palestinians have been barred from working in Israel, making it hard to complete harvests.
The cabinet's far-right ministers refuse to budge on the issue of Palestinian workers, saying they would present a security risk (although for their constituency, they have approved Palestinian workers in settlements). Instead of Palestinians, the plan is to bring in tens of thousands of workers from India, Sri Lanka and Uzbekistan. To date the numbers to arrive have been paltry.
Another big trouble spot is high-tech, whose workers were called up for reserve duty in higher numbers than any other sector. The reservists have mostly returned to their jobs, but the industry is still contending with a global tech slump. The mood is dangerously bearish for an industry that is built on hopes and dreams.
The tourism sector has also been hit hard and sees no prospect for recovery anytime soon. Arrivals have shrunk to almost nothing (they were down 75 percent in January from a year ago) and many foreign airlines haven't resumed service, so airfares remain high and flight options relatively few. The 2024 peak summer season is all but doomed.
Hovering above all these sectoral woes is the sense that Israel is not getting back on track. Even if war with Hezbollah doesn't break out, the security situation will remain tense for the foreseeable future. The Finance Ministry estimates that military spending will be permanently higher by at least 1.4 percent of GDP under a long-war scenario. The army will need more men and women serving for longer stints.
There is also a growing sense that the "together we will win" ethos is also entering the history books: The political and social controversies that ripped Israel apart before October 7 are gradually coming back. Instead of the judicial overhaul, this time they will coalesce around Netanyahu's refusal to call an election and his seeming willingness to divide so he can continue to rule.
There is also the emerging controversy over army conscription and the Haredi exemption, and as hard as it is to believe, Justice Minister Yariv Levin may even try to revive his judicial overhaul drive.
Even before October 7, the economy had been slowing, in part due to the political upheavals set off by the judicial overhaul. Netanyahu and his coalition partners don't seem to be concerned about how even more fragile the situation is after October 7 and that the room for fomenting political upheaval is almost zero. Finance Minister Bezelel Smotrich insisted in the wake of the Moody's downgrade, the Israeli economy is resilient. But it is not endlessly resilient.