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Gaza war risks slowing Israeli economy to contraction

Israelis take cover as sirens are heard in the Israeli coastal city of Ashkelon, 13 kilometers from the Gaza border, on August 24, 2014. AFP PHOTO/DAVID BUIMOVITCH

OCCUPIED JERUSALEM: At the Ashkelon factory of Israeli mattress manufacturer Polyron, the sirens set off by militant rocket fire from the Gaza Strip just 8 kilometers to the south are taking a toll.

“Instead of doing 100 mattresses, you do 50 or 60, having to run five or six times a day to the bomb shelter,” said marketing executive Alon Zimmerman. As a result, sales in July plunged by a third from the same month in 2013, a shortfall Zimmerman estimates will take a year to make up.

While businesses close to Gaza have been hurt worst by Israel’s seven-week battle with Hamas and other Palestinian militants groups, the fighting has also deterred tourists and dented consumer spending nationwide. An indicator gauging sentiment among corporate purchasing managers showed economic activity contracted in July for the second month.

Unlike previous conflicts with Hamas or Hezbollah, Israel entered the fighting in Gaza with an economy already losing momentum: growth slowed in the second quarter as exports slumped due to a strong shekel. The central bank has already cut its benchmark interest rate to a five-year low, leaving policymakers with less leverage to spur growth and tame the currency. All 20 economists in a Bloomberg survey forecast that the bank will hold the rate at 0.5 percent Monday.

“We didn’t go into this war in such good shape,” said Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv. “So the recovery will probably take longer than it did in the past, and we’ll see the effects through the end of this year, and probably into 2015.”

Growth slowed in the second quarter to 1.7 percent from 2.8 percent in the previous three months, as exports, which account for about a third of the economy, tumbled 18 percent, according to official data released Aug. 17. Since then, the benchmark TA-25 Index of equities has dropped 1.2 percent, compared with a 1.2 percent increase for the MSCI World Index.

Complicating the task for policy makers and exporters is a currency that has held near a three-year high since the Gaza conflict escalated in early July and last traded at 3.5260 to the dollar.

Israeli attacks in Gaza have killed more than 2,100 Palestinians, mostly civilians, according to Gaza officials. Sixty-eight people were killed on the Israeli side, all but four of them soldiers, as a series of truces collapsed under militant rocket fire and Israeli airstrikes.

Tourism, which accounts for about 7 percent of Israel’s economy, has been among the hardest-hit industries. The number of visitors declined in July by 26 percent from a year earlier. The conflict has cost the tourist industry at least $566 million, according to the Israeli Tourism Ministry.

The Bank of Israel, led by Governor Karnit Flug, cited the Gaza conflict as a factor in its surprise July 28 decision to cut the benchmark rate by 25 basis points. It said previous military conflicts of a similar magnitude shaved about half a percentage point off gross domestic product.

Rafi Gozlan, chief economist at Israel Brokerage & Investments-IBI Ltd, said he expects economic output to contract between 1.5 percent and 2 percent in the third quarter.

“What’s been published so far about July is very reminiscent” of the July 2006 war with Hezbollah, he said in a phone interview last week. The economy contracted 1.4 percent in the third quarter of 2006. Both Hamas and Hezbollah are classified as terrorist organizations by the U.S. and Israel.

Israel’s Purchasing Managers Index published by Bank Hapoalim dropped in June to 48.9 from 55.6 in May. Last month, it fell again to 46.8, said the bank, Israel’s largest lender by assets.

“We assess that economic activity is experiencing a sort of contraction, that began before the start of the Gaza operation,” the bank said Aug. 18. “This contraction will worsen in the current quarter, although some degree of rebound can be expected as soon as the hostilities cease.”

The economy may still grow 3.3 percent this year, little changed from 2013, compared with 1.75 percent for the world’s top 10 advanced economies, according to economists’ estimates on Bloomberg. Israel’s economic expansion outstripped the U.S. and the eurozone in each of the last four years.

Still, the constant disruptions to daily life caused by the rocket fire have had the biggest impact on businesses in the south bordering Gaza. According to a survey by the Israeli branch of Dun & Bradstreet, about 20 percent of businesses in the south, their situation aggravated by the Gaza conflict, are now in danger of closure.

While the Bank of Israel is unlikely to cut interest rates today, the monetary panel may lower borrowing costs at least once more before the end of the year, according to Daniel Hewitt, a senior emerging-markets economist at Barclays Plc.

“At this point though, there’s not much further they can cut, so the impact is limited,” Hewitt said. Manufacturers have urged the central bank to cut the base rate to zero and buy enough dollars to keep the local currency at 3.8 to a dollar.

Calls are also growing for the government to do more to help. The Finance Ministry has said it will give tax breaks to businesses within 40 kilometers of Gaza, in line with existing guidelines.

That may not be sufficient, according Polyron’s Zimmerman. “Companies have been really hit here, and have had to invest a lot in security measures,” he said. “The government should really be doing more.”

 
A version of this article appeared in the print edition of The Daily Star on August 26, 2014, on page 6.

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Summary

At the Ashkelon factory of Israeli mattress manufacturer Polyron, the sirens set off by militant rocket fire from the Gaza Strip just 8 kilometers to the south are taking a toll.

All 20 economists in a Bloomberg survey forecast that the bank will hold the rate at 0.5 percent Monday.

Growth slowed in the second quarter to 1.7 percent from 2.8 percent in the previous three months, as exports, which account for about a third of the economy, tumbled 18 percent, according to official data released Aug. 17 .

Israeli attacks in Gaza have killed more than 2,100 Palestinians, mostly civilians, according to Gaza officials.

The Bank of Israel, led by Governor Karnit Flug, cited the Gaza conflict as a factor in its surprise July 28 decision to cut the benchmark rate by 25 basis points.

Rafi Gozlan, chief economist at Israel Brokerage & Investments-IBI Ltd, said he expects economic output to contract between 1.5 percent and 2 percent in the third quarter.

The economy contracted 1.4 percent in the third quarter of 2006 .

The economy may still grow 3.3 percent this year, little changed from 2013, compared with 1.75 percent for the world's top 10 advanced economies, according to economists' estimates on Bloomberg.


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