A top Israeli economist says a recession is almost certain as leaders warn of a long war

SDEROT, ISRAEL – OCTOBER 13: Israeli army take security measures as they deploy dozens of tanks and armored vehicles to the Gaza border area in Sderot, Israel on October 13, 2023. (Photo by Turgut Alp Boyraz/Anadolu via Getty Images)

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Israeli ground troops are massed near the border with Gaza, following Hamas’ brutal terrorist attacks that killed 1,400 people.

But after more than a week of deadly air strikes in Gaza, an expected ground invasion hasn’t begun, surprising many military analysts, while officials warn of a long fight with Hamas. The war has also left much of Israel’s economy in limbo. More than 360,000 reservists, the backbone of Israel’s Defense Forces, are now in uniform and away from their jobs.

“The economic impact of something like this is immediate,” said Joseph Zeira, a prominent economist, former professor at Hebrew University and author of “The Israeli Economy: A Story of Success and Costs.”

A recession is almost guaranteed, Zeira predicts, as many parts of Israel are facing a drop in productivity.

“Tourism has stopped. People in Israel aren’t going out right now to eat or shop” said Zeira.

What’s the economic fallout?

The financial world is paying attention, too.

On Tuesday, Fitch put Israel’s long-term debt on rating watch negative, meaning it is prepared to lower the credit rating.

“The risk that other actors hostile to Israel, such as Iran and Hezbollah, could join the conflict at scale has risen significantly, as indicated by regular fire exchanges on the Israel-Lebanon border and declarations from high-ranking officials in Iran and from Hezbollah,” Fitch wrote.

Fitch fears the fighting could take a long time. Indeed, Prime Minister Benjamin Netanyahu on Thursday warned of a “long war.”

Israel has often won wars by striking fast and hard inside enemy territory, but due to the complexity of fighting in Gaza, the next phase is coming slower than expected. There is also a fear among army officers and the government that once they fully commit to a ground invasion in the south, where Gaza is located, Hezbollah will take advantage to launch an invasion from Lebanon in the north.

Zeira, the economist, is also worried about a protracted fight.

“The military is going to want to move slowly to avoid casualties, but the longer this goes, the more damaging it is to the economy,” he said. “I don’t know how the government will solve this problem.”

Israel’s Ministry of the Economy could not estimate which economic sectors have lost the most reservists, but most of those who joined the fight are under 40 years old. That younger population plays an outsized role in Israel’s technology economy which accounts for about a third of Israel’s exports and a fifth of its annual gross domestic product.

How are Israeli companies reacting to the war?

Donated clothing at Varonis’ Israel headquarters

Photo: Guy Melamed

The war is having a particularly big impact on Israel’s dynamic tech sector.

Varonis is a cybersecurity company, one of many in Israel that’s found large parts of its workforce reporting for military duty. The company’s main campus is in Herzliyah, north of Tel Aviv. When Israel went to war with Hamas earlier this month, Varonis told its 750 Israel-based employees to work from home.

Read more: How Israeli’s tech community is responding to the war

“We transformed our office into a temporary home with mattresses, pillows, food and clothes for 250 people who had just fled towns near Gaza,” Chief Operating Officer Guy Melamed told CNBC in a telephone interview.

Israeli families forced from their homes gather at Varonis.

Photo: Guy Melamed

The company brought in social workers to help panicked survivors while supplying activities for children.

“Nobody here had ever worked in the hotel industry, but we were able to use our high-tech experience to predict metrics and help with the process,” Melamed said.

Over the last few days the 250 evacuees have moved on to hotels with government help. Melamed said “we were able to help with some light in a time of darkness.”

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But it’s increasingly looking like the war won’t be a mere short-term concern for Varonis and other Israeli companies.

At a funeral Thursday for one of the civilians killed in the Hamas attack, former Minister of Defense Benny Gantz who is now one of three members of Israel’s “war cabinet” warned the fighting is likely to take months to complete. To compare, Israel’s 2006 war with Hezbollah in Lebanon took 34 days.

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