The Israeli economy has long been accustomed to the impact of wars. Every war comes with a cost, and the longer the conflict lasts, the greater the cost. Particularly, the large-scale offensive from Iran poses a much bigger economic challenge for Israel—but under the leadership of the hardline Prime Minister Benjamin Netanyahu, this war-prone country is taking great risks in hopes of gaining an important return from the war.

Netanyahu launches multiple wars

Losses caused by Iran's attacks.

The retaliatory strikes from Iran have inflicted direct damage on Israel. The significant damage was particularly severe at Israel's key industrial parks, such as the Haifa oil refinery. Natural gas production facilities were also affected. Some natural gas facilities have been shut down as a precautionary measure; including the production of the Leviathan gas field in the Mediterranean Sea, which is mainly for export. Gas-powered power plants are also at risk. These power plants provide electricity to most parts of Israel.

"Such strikes would be devastating for Israel—not only due to economic losses but also because it could affect public morale," Esteban Klor, an economics professor at the Hebrew University of Jerusalem, told the Swiss Neue Zürcher Zeitung (NZZ). If a power plant is attacked and causes a city to lose power for several days, the consequences will be catastrophic.

Report from the Swiss Neue Zürcher Zeitung

Direct costs of the war.

Since launching a major offensive in the Gaza Strip in October 2023, Israel's military has remained in a state of war. Even before attacking Iran, the defense spending budget for 2025 already accounted for 4.9% of the GDP. The May budget deficit was roughly the same.

"If the war with Iran continues for a month, military spending is expected to reach around 2% of the GDP," economist Klor estimated that the cost of airstrikes and defending against Iran's counterattacks is equivalent to approximately 46 to 69 million Swiss francs per day (about 505 million RMB per day on average).

Israel anticipates Iran's retaliation

Klor predicts that other parts of the national budget will be cut to meet the growing military needs. He is concerned about the reaction of international rating agencies, whose credit ratings greatly influence whether and under what conditions international lending institutions are willing to lend to Israel.

Since the summer of 2024, all three major international rating agencies have downgraded Israel's ratings. Moody's pointed out that the war with Iran might be a reason for further downgrades. However, Israel's ratings still have room for improvement within the investment grade range. Currently, Israel's national debt is around 67% of its GDP, which is at a sustainable level.

Mutual aerial strikes between the two countries

Economic paralysis.

War is not good for business. Ben-Gurion Airport is closed, and tourists are avoiding Israel. Hundreds of thousands of reserve soldiers called up for duty are forced to leave their businesses. Due to restricted mobility, many Israelis can work from home only when their jobs allow. However, the longer the conflict lasts, the greater the risk that businesses will default on loans or even go bankrupt.

However, according to Barclays, Israel's banks remain well-capitalized. In an emergency, the Bank of Israel has sufficient ability to provide liquidity to various institutions. As of the end of May, its foreign exchange reserves reached $224 billion, accounting for 41% of GDP.

This also means that monetary authorities have the full capacity to intervene in exchange rates and purchase shekels (Israel's currency). Israel heavily relies on imports, and the outbreak of war may depress the value of the Israeli currency, thereby increasing inflation. Inflation was 3.1% in May. In January 2024, the price increase reached 3.8%, the highest level since September 2023, and thus the highest since the outbreak of the Gaza War. Government officials attributed this to the consequences of the war.

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But Israel also has significant advantages:

This country has long been accustomed to conflicts. Moreover, the economy often seems better in many ways after a war.

In early April, economists from the OECD commented that the Israeli economy had responded very strongly to the Gaza War. They predicted that GDP growth would reach 3.4% this year following a 1% growth rate in 2024. This growth rate may decrease slightly now. However, the unemployment rate has remained at a low 3% recently.

TA-35 rises sharply under multiple wars

Since the start of the major offensive in the Gaza Strip, Israel's main stock index TA-35 has surged significantly. Since the beginning of 2024, the increase has reached about 45%. It is evident that the military strike on Iran in 2024 and the recent large-scale offensive did not disrupt the stability of the Tel Aviv Stock Exchange. According to Barclays, so far, the strong fundamentals of Israel's large enterprises have not been affected. Analysts also predict that Israel's strike on Iran will weaken Iran's military and nuclear capabilities in the long term, thereby enhancing Israel's securities.

Esteban Klor made a similar assessment: "Despite the high costs, eliminating the Iranian threat will bring long-term economic benefits to Israel." For twenty years, dealing with Iran has placed a heavy burden on defense budgets. Klor said that if Israel eliminates the perceived Iranian threat, these funds could be used more effectively. Geopolitical risks will decrease, and market confidence will strengthen.

Tel Aviv, a major economic hub of Israel

But everything depends on how quickly Israel's fighter jets can deliver a decisive blow to Iran's nuclear program. If Israel fails to achieve its goals and becomes entangled in a protracted war with Iran, the economic losses will be massive.

The Neue Zürcher Zeitung points out that for Prime Minister Netanyahu and Israel, the best outcome is that in a few days, Iran will return to the negotiating table and accept the conditions proposed by Israel and the United States. This way, Israel would no longer face the so-called "development threat." At that point, Israel would achieve the desired returns from the war: enhanced geopolitical status and long-term economic development for Israel.

Original article: https://www.toutiao.com/article/7517643470845067813/

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