A Matter of Time

The previous recession began with the tourism industry, which is so sensitive to security related events. What happened then is happening again now.

The previous recession began with the tourism industry, which is so sensitive to security related events. That was at the end of 2000, when hoteliers were sure they were about to embark on their best year ever, but then the intifada began, and all their hopes crashed in flames.

What happened then is happening again now. The expectations of hoteliers were sky high just a week ago. They had been hoping to break the record 2.6 million tourists set in 2000. But then Hezbollah began its operations, and the missiles scared tourists away. The bed and breakfasts in the North are empty, and the hoteliers are receiving cancelations.

Not only is the tourism industry hurting. Northern factories and businesses are barely functioning, and some of farmers cannot go out to the fields to pick their fruit.

Does all this mean that we are expected to go from rapid annual growth of 5 percent to a deep recession and negative growth - as happened in 2001-2003?

The cause of the deep recession in 2001-2003 was the suicide bombings in malls and at shopping and entertainment areas. The bombings caused Israelis to avoid crowded areas in large cities in central Israel, and the moment the mass of consumers in Tel Aviv, Netanya, Hadera and Jerusalem barricaded themselves at home and stopped buying, factories were forced to downshift and shops had to close. Many employers cut wages and laid off employees, which caused a further decline in consumption, and the recession became more serious.

The current situation is entirely different. The war thus far has harmed the Galilee and Haifa, but has not paralyzed economic activity in central Israel. And even if missiles fall further south and reach the Dan region and Tel Aviv, will we then find ourselves in deep recession?

Everything depends on how the public behaves. Will central Israel residents lose their confidence the minute the first missiles fall? Will they lock themselves up in their homes, afraid to go to work, to malls, or entertainment venues, leading to a drop in personal consumption and eventually a recession?

It seems that the answer to these questions will emerge over time. If this is a short war of a week or two, the Israeli economy can absorb the blow of a drop in demand without falling into a recession circa 2001-2003. But the prime minister has declared that the operation in Lebanon will not end without achieving its two main goals: a significant blow to Hezbollah's military capabilities and the withdrawal of its forces from Israel's northern border and the deployment of Lebanese army forces. Therefore, the question is whether these aims can be achieved in a week or two.

Hezbollah has been preparing for this war for six years, since the May 2000 IDF withdrawal from southern Lebanon. During those years it succeeded in arming itself with various weapons, including Iranian-made Fajr missiles capable of reaching Haifa and apparently also Tel Aviv.

Israel had a number of to opportunities to deal with these missile shipments throughout those years, but opted to hold back. And of course, when there is no timely action, the grass that used to be short and easy to mow five years ago is now a wild field that is difficult to access.

We should also remember that there were many in the army, including former chief of staff Moshe Ya'alon, who said that it is possible to allow Hezbollah to stockpile missiles "until they rust" and become useless. But Hezbollah had other plans. It stockpiled the missiles and used them.

Either way, the war in the North already has had an economic cost. Growth that estimated to be moving along at a 5-percent annual rate will be slower, and unemployment will rise. Foreign and local investments will be harmed, because when uncertainty is high, people delay decisions. In addition, the missiles have caused direct damage to apartments and buildings, and of course, the stock market drop has hurt everyone.

Social welfare plans will also suffer. According to the original plan, NIS 500 million was to be cut from the 2006 defense budget followed by a further NIS 2 billion in the 2007 budget in an effort to direct these funds to the war on poverty, and supporting the elderly and weaker segments of society - all in line with coalition agreements. Now it will be difficult to make the cuts in the army, which undoubtedly will ask for budget supplements so it can replenish its stocks and pay for the fighting. Thus, once more, social welfare plans will be sacrificed.

But even if Hezbollah manages to strike the Dan region, and it may do so when its back is against the wall, the damage will not last for long. Therefore, economic activity will not cease, and we won't deteriorate into a recession.

The IDF may want to draw out the war's deadline in order to achieve the aims that Prime Minister Ehud Olmert put forth, but it also must understand that one of the important goals is the preservation of the current economic growth and its pace, because socio-economic strength is a precondition to military might. Therefore, the time factor must play a central role in the entire decision-making process.