Since October 2023, Israel and its Mediterranean neighbours have been in chaos. Tel Aviv launched a retaliatory strike on the Gaza Strip after Hamas’ October 7 attack on southern Israel. The conflict, which has now entered its sixth month and has already seen the death of over 1000, has affected Israel’s economy severely.
While industries are now pausing their operations despite getting new investments, the Benjamin Netanyahu government has reportedly subsidised the salaries of 360,000 mobilised reservists deployed to Gaza, with many of them being professionals in finance, artificial intelligence, pharmaceuticals and agriculture.
What’s the scene now?
In November 2023, the Bank of Israel put the Gaza war’s ‘gross effects’ on Israel at 198 billion shekels ($53 billion) and revised its estimates for the country’s economic growth to 2% per year for 2023 and 2024.
In the following month, Israel’s Finance Ministry estimated that the conflict will likely cost the Middle Eastern nation approximately $13.8 billion in 2024 if the war’s ‘high-intensity phase’ concludes during the first quarter of the year.
One of the Israeli industries that have continued to do well is the high-tech sector, which has been the country’s fastest-growing sector in the last few years. The industry right now accounts for close to 20% of Tel Aviv’s GDP and 14% of jobs.
Since October 7, over 220 venture capital firms have expressed their solidarity with Israel and called on investors worldwide to continue to support Tel Aviv’s tech ecosystem.
In December 2023, executives from United States-based venture capital, tech and private equity firms took part in the ‘Israel Tech Mission’. US chipmaker Intel Corp has already confirmed its plans of building a $25 billion chip-making factory in southern Israel, while in the final quarter of 2023, Israeli tech start-ups managed to raise $1.5 billion.
However, the tourism sector has been the worst sufferer of the Gaza conflict. The sector, which accounted for 2.6% of GDP till 2019 and fell to 1.1% in 2021, has further gone downhill.
Soon after the war began, many airlines suspended the majority of their operations in Tel Aviv. As of January 2024, Lufthansa and its subsidiaries, including Swiss International Air Lines and Austrian Airlines, have resumed their flights to Israel.
Before Hamas’ October 7 attack, a monthly tally of visitors arriving in Israel numbered above 300,000. In November, that figure reportedly went down to 39,000.
Construction, which accounts for 14% of Israel’s GDP, has also taken a significant hit since the beginning of the Gaza conflict. Projects have been paused and Tel Aviv froze worker permits for Palestinians who used to make up 65-70% of the sector’s workforce.
The gap created by the Netanyahu government’s move has not yet been filled by Israeli workers, as all of them have been serving as reservists in the war. Also, foreign workers have left the country in huge numbers since the conflict’s beginning.
In November 2023, the Israel Builders Association said that the construction industry was operating at roughly 15% of its pre-October 7 capacity. In December, 8,000-10,000 Palestinian workers were permitted to resume work on Israeli settlements in the West Bank. The Netanyahu government decided after facing pressure from business owners.
Also, Israel is known for using the Red Sea route for its imports. However, the Houthis (an armed political and religious group, claiming themselves to be part of the Iranian-led ‘axis of resistance’ against Israel, the United States and the wider West) have been hammering the commercial shipping in this route through multiple drone and missile strikes.
Considering Israel and the West as its enemies, Houthis, as of January 23, have attacked over two dozen ships, a spree which started with the hijacking of a commercial ship in the Red Sea on November 19.
While these militants say that they are targeting Israeli-linked ships, many of the vessels which have been attacked have no connection with Tel Aviv. The result is shipping companies stopping the usage of the Red Sea, through which almost 15% of global seaborne trade passes. Commercial shipping is now using the much longer route around southern Africa, which is increasing their operational costs.
The United States and the United Kingdom carried out air strikes on Houthi targets in Yemen in January. Immediately after that, three American soldiers were killed and dozens were injured in a drone strike in northeast Jordan, which as per the reports, was a retaliatory one in nature.
Washington, in response, conducted an air assault on dozens of sites in Iraq and Syria used by Iranian-backed militias and the Iranian Revolutionary Guard, with Joe Biden indicating that more such responses will be seen by the world in the coming days.
Since Washington’s relationship with Tehran has shown no signs of normalcy, the Houthi episode has added one more chapter to it. Iran has been charged with smuggling weapons to the Houthis during Yemen’s civil war in violation of a United Nations arms embargo, a charge which Tehran has denied so far.
Region stares at an uncertain future
The whole geopolitical crisis in the Middle East has disrupted both global trade and imports. Take Israel for example, which is performing its imports from Asia through an African reroute, which is bumping up costs further.
Although the cat-and-mouse game between the West and Houthis has not become a full-blown war, it has already done significant damage by blocking trade routes, disrupting global shipping and devastating local economies.
Egypt’s non-oil economic activities have recorded a further productivity decline, with geopolitics weighing on tourism activity and high prices weakening demand.
The headline purchasing managers’ index (PMI) for the country fell to 48.1 from 48.5, with anything below 50.0 indicating a decline in business conditions.
David Owen, senior economist at report authors S&P Global Market Intelligence, said, “Some firms signalled that the Israel-Gaza conflict and associated geopolitical tensions had a negative impact on tourism activity, which could lead to further headwinds for the non-oil economy over the next few months. Reflecting this, firms were also less upbeat about future activity and kept employment numbers largely unchanged.”
Suez Canal, the hotbed of Houthi activities, is known for offering the global economy the shortest way between Asia and Europe, apart from helping Egypt earn about $10 billion a year.
The number of vessels transiting the canal has dropped by 30% in the first 11 days of 2024 compared to the same period last year, as per the Suez Canal chief Osama Rabie. Tonnage and dollar revenue have also gone down by 41% and 40% respectively.
The Suez Canal Authority has increased transit fees, raising them by up to 15% for tankers.
Before the Gaza conflict, a fifth of the average Middle Eastern country’s total exports, from Israeli tech to oil from the Gulf, used to be traded smoothly between the countries. After October 2023, things changed as the routes that transported more than half of all goods were blocked, resulting in the collapse of the intra-regional trade.
Also, the cost of shipping goods has gone up, something which can cause exporters operating on razor-thin margins to go out of business in the coming months.
“The Red Sea used to handle 10% of all goods moving around the world. But since the Houthis began launching missiles, its shipping volumes have dropped to just 30% of normal levels. On January 16th Shell, an oil and gas giant, became the latest multinational to say it would avoid the Sea,” Economist commented further.
Will there be any respite?
Eritrea, for example, runs its economy through fishing, farming and mining exports, all of which take the seaborne route. Due to the tense geopolitics, the Eastern African country has entered the ‘Danger Zone’. For crisis-stricken Sudan, the Red Sea is the sole point of entry for aid. Since the beginning of the Houthi unrest, the humanitarian crisis for the 24.8 million people in the African nation has escalated further.
Egypt is already in ruins. The Abdel Fattah El-Sisi government earned $9 billion in 2023 from tolls on the Suez Canal. Without this particular revenue in 2024, Egypt’s central bank may run out of foreign exchange reserves, which stood at $16 billion (or two months’ worth of imports) in 2023 start. Egypt’s year-to-date income from the Suez Canal has been 40% less in January 2024. The country faces the risk of running out of dollars, which will likely push the government into default and its budget into disarray.
Jordan’s tourism sector, which constitutes 15% of its GDP, has been a foregone tell, thanks to the geopolitics. Immediately after Hamas’s October 7 attacks, international arrivals to Jordan fell by 54%. The government has turned to the West to fill the hole in its finances. In January 2024, the International Monetary Fund (IMF) made available new bail-out money. Despite all these problems, Jordan’s economy grew by 2.7% by the end of the 2023 third quarter, with the hospitality sector achieving the highest growth rate of 6.3%, despite the geopolitical tensions affecting the tourist inflows.
In fact, as per the IMF, Jordan has effectively managed to overcome the economic difficulties stemming from the Gaza conflict through several fiscal measures. Jihad Azour, the director of the Middle East and Central Asia Department at the IMF, commended Jordan’s economy at the beginning of 2024, for successfully navigating the challenges arising from the hostile regional geopolitics. However, Azour recommended that Jordanian authorities continue implementing effective economic policies to safeguard against potential spillovers from the Gaza conflict.
Azour also noted the positive impact of the recent government-IMF programme, asserting that the arrangement played a crucial role in activating economic and financial measures in the country.
“This, in turn, strengthened the solvency of public finances, providing Jordan with increased borrowing opportunities at favourable interest rates in alignment with national economic reforms, according to the director,” commented the Arab News.
However, it was Lebanon and the West Bank, which felt the worst impacts of the Gaza war. With Israel and Hizbullah going toe to toe against each other, they are also destroying southern Lebanon.
“More than 50,000 people have already been displaced (as well as 96,000 in northern Israel). Repairs will be expensive, but there is no cash left for them: Lebanon has had a shell government since it defaulted in 2019. In recent months its economic free-fall has accelerated as foreign tourists and banks, which together make up 70% of its GDP, have deserted the country on the advice of their governments,” commented The Economist.
A massive regional spill over expected
In 2024 beginning, the IMF underscored that the Gaza war served as a significant shock to the MENA (Middle East and North Africa) region, posing economic challenges throughout the region.
As per Azour, regional developments have led to a 0.5% reduction in the expected growth of economies for 2024, settling at 2.9%.
Moreover, inflation will decline in most economies across the region, maintaining a negative trajectory for the average growth in low-income countries.
As per the IMF, Jordan has sustained a broad-based recovery amid a challenging external environment, thanks to the authorities’ effective policy response. However, the same thing can’t be stated about the other nations in the region.
In December 2023, a United Nations study revealed that the economic repercussions of the Gaza conflict would hit neighbouring Arab economies hard. The economic cost for Lebanon, Egypt, and Jordan was projected to soar to $10 billion, potentially pushing over 230,000 people into poverty.
The conflict put pressure upon the existing fiscal pressures in the region, resulting in sluggish growth and high unemployment in the three Arab countries, apart from deterring investments and impacting consumption and trade.
The study, commissioned by the United Nations Development Programme, indicated that the economic toll on the three Arab states, in terms of loss of GDP, could reach $10.3 billion or 2.3%. The situation could worsen if the conflict persists till the middle of 2024.
Jordan seems to have defied the grim prediction. Unfortunately, its neighbours have hit the rough seas and given the fact that the regional volatility won’t settle down anytime soon, the MENA region will continue to feel the pinch.
If the region slides into a debt crisis, the worst sufferer will be its young and urban population, which is also increasingly unemployed. This will add more fuel to the regional volatility, something which the world can’t afford at all, given the strategic importance of the MENA. What may begin as economic volatility, can take a disastrous political shape in no time. And this doesn’t look good for the region.