The war which broke out on October 7 has had a considerable economic impact on the Israeli economy, including the mass deployment of IDF reserve soldiers, evacuation of residents of frontier communities, restrictions imposed by the Homefront Command, and a decrease in the consumption of goods and services. Defense expenditure has risen substantially due to the necessity of financing the war effort, compounded by compensation for property damages and the allocation of civilian emergency funds towards the financial support of evacuees, relief for businesses and furloughed workers, and reconstruction of communities which were destroyed during the attack and the ensuing warfare.
The aim of this paper is to present an economic analysis of the effects of the war on the Israeli economy, as well as the effects of the macroeconomic changes on Israel’s Haredi society.
To estimate the impact of the war on the national economy, we assume two scenarios. According to our Base Scenario, which assumes fighting in the Gaza front along with targeted military activity along the northern border and in the West Bank, as we have seen unfolding in the last four months, the forecast made by Aaron Institute predicts that GDP growth in 2023 will be 1.5%, compared to the forecast issued prior to the war which was 3%. As for 2024, our forecast is that the economy will grow at a rate of just 1%. In a severe war scenario, which assumes escalation on the northern front as well, Aaron Institute’s forecast predicts a GDP growth of minus 2% in 2024.
The effects of the war on Haredi society were examined in light of the macroeconomic analysis, while also recalling the security crisis during the Second Intifada (2000-2005) and the economic crisis of that time. According to our analysis findings, the decrease of inflation rates back to the range prescribed by the Bank of Israel (1%-2%), along with forecasts for the financial markets both in Israel and globally predicting interest rate cuts, indicate that the interest on mortgages is also expected to decrease. This reduction is expected to ease the burden on mortgage-paying households, many of whom are Haredi. However, disruptions in the construction sector, mostly due to the shortage of workers, may disrupt housing supply and lead to a price increase – a trend which will negatively affect new homebuyers.
Analysis of the labor market shows that Haredi people are not employed in sectors which have been damaged by the war (such as construction and tourism), however the impact of the war may be manifested in increased pressure to enter the labor market. The scrapping of the proposed military draft bill may increase pressures to promote equality in the burden of service and to encourage participation of Haredi men in military or national-civic service. Curtailment of transfer payments and social services, as well as a reduction in distributive funds allocated directly for Haredi causes and an increase in taxes, are also expected – insofar as they are enacted – to harm Haredi society and cause a significant increase in poverty rates. We discuss these changes and repercussions with due caution, considering that some of these changes will be implemented or take effect only in years to come, once the war ends and its outcomes and economic implications are fully grasped.