Israel's economy defies mounting threats

By ALEX BRUMMER

Updated:

The murderous Hamas attack on Israeli citizens, which has been met with ruthless retaliation, has been compared to the Yom Kippur war of 1973 in its ferocity and element of surprise.

In terms of its economic and geopolitical impact, the conflict looks unlikely to have the same devastating impact on global output and inflation as the war of 50 years ago.

Israel's economy is now among the most robust in the Middle East and is well equipped to ride out a lengthy engagement even if 300,000 citizens remain mobilised.

Most critically, it has better relations with several neighbours and in the Gulf. But an Iranian intervention, either directly or by its Hezbollah proxies on Israel's northern borders, would raise the stakes.

The current Hamas-inspired conflagration is another uncertainty for a global economy weighed down by debt and inflation in the aftermath of Russia's assault on Ukraine, and Covid.

High-tech: The Azrieli Towers in Tel Aviv

High-tech: The Azrieli Towers in Tel Aviv

The International Monetary Fund's (IMF) new world economic outlook underlines the fragility of recovery with global output to rise just 3pc this year and a dismal 2.9 per cent in 2024. It would not take much to tip the whole world into a downturn.

The World Bank's new president Ajay Banga noted at the IMF/World Bank annual meetings in Marrakech, Morocco, that the conflict was 'more limited' in scope than the Ukraine war. He grimly added that if it were 'to spread in any way, then it becomes dangerous'.

For Western developed economies the biggest threat would be some kind of blockade in the Gulf, halting or slowing oil and liquefied natural gas shipments, or an Arab embargo.

The closing of the Strait of Hormuz and embargo in 1973 shattered Western prosperity and stability with a great inflation. It sent Britain's Labour government to the IMF for a bail-out and all but assured the defeat of Jimmy Carter in the 1980 US presidential election amid failure to resolve an energy and dollar crisis.

Much has changed. The US is energy self-sufficient. Israel has a tense peace with Egypt and Jordan and wealth-creating alliances in the UAE. A peace and trade deal with Saudi Arabia, now dead, looked on the cards.

And Israel is no longer a young orphan state propped up by German reparations and American assistance. It is a high-tech economy which lost only 1.9 per cent of output in the pandemic, against 4.9 per cent across the OECD.

It grew by 8.6 per cent in 2021 and 6.5 per cent last year.

The thriving start-ups contributed to half of its exports last year and make up 15 per cent of national output. It now sits on $200billion (£164billion) of cash reserves which meant the Bank of Israel could step into the markets, spending £24.6billion of reserves, on supporting the shekel and keeping the banking system liquid.

Ferocious: Israeli soldiers during the Yom Kippur War in 1973

Ferocious: Israeli soldiers during the Yom Kippur War in 1973

Israel's debt to GDP ratio of 60 per cent is something most European economies, including the UK, can only dream of.

Most remarkably, it is also energy self-sufficient as result of gas discoveries off its northern shores. It is deploying its tech skills to block the funding of Hamas by freezing crypto currency accounts used to solicit and receive donations. Qatar, a traditional provider of economic support to Gaza, may have to resort to flying in plane-loads of dollar bills for distribution.

IMF projections suggest a 10 per cent rise in oil prices, as a result of the conflict, would reduce international output by 0.15 per cent and add 0.4 per cent to inflation next year. An oil embargo or all-out war with Hezbollah and Iran would wreck such calculations and cause economic mayhem.

On hold are plans, unveiled at the G20 in New Delhi, for an India-Middle East-European trade route running through Israeli port Haifa. War makes the prospect of a trade-led global upturn ever more remote. 

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