Israel’s Economy Barely Felt Gaza Operation. War With Hezbollah Would Be Different

Sixteen years and seven conflicts between Israel and the Palestinian groups in Gaza have barely had an impact on business and investment. But a battle with Hezbollah in Lebanon could be very costly

David Rosenberg
David Rosenberg
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Israel's Iron Dome anti-missile system at work in Ashkelon on Saturday as rockets are launched from Gaza.
Israel's Iron Dome anti-missile system at work in Ashkelon on Saturday as rockets are launched from Gaza.Credit: Amir Cohen/Reuters
David Rosenberg
David Rosenberg

If the Israel Defense Forces had to pick a good time from the economy's perspective to have a war, it couldn’t have done better than with Operation Breaking Dawn.

Since 2006, Israel has engaged in no fewer than seven rounds of fighting with Hamas, Islamic Jihad and Hezbollah, all of which were big enough to receive an official name. This has provided plenty of evidence to show economists, investors, businesspeople and consumers that wars like these have no more than a marginal impact on the country’s economy.

Where these wars do have an effect is on tourism and consumer spending. But with Breaking Dawn, even that impact has been minimal (assuming the cease-fire announced late Sunday holds) because the fighting was so short, occurred on a holiday weekend and was largely ignored by the world.

The conflict broke out on Friday, too far into the summer tourism season to spark cancellations for the rest of the summer. The fighting was over in less than three days, and during that time it barely caught the world’s attention, certainly compared to previous wars with Gaza, according to Google Trends data on “Gaza” searches. Few people with tickets and hotel reservations for the September-October Jewish holidays were even aware a war was on.

Lebanese scouts carrying Hezbollah flags during a procession in Beirut on Tuesday.Credit: Aziz Taher/Reuters

By contrast, 2014’s Operation Protective Edge lasted 50 days, saw Ben-Gurion International Airport briefly shuttered due to missile threats and headlined the world media. It generated record numbers of Google searches for Gaza. That’s why it took the Israeli tourism industry more than a year to recover from travelers’ anxiety about visiting a war zone. Breaking Dawn is unlikely to have that kind of effect.

In any case, the tourism industry hasn't been a major contributor to the Israeli economy (about 2 percent of gross domestic product), and these days its contribution is even smaller. The pandemic sent tourist arrivals close to zero, and while the numbers have recovered, they've yet to reach anywhere near the old levels. In July, arrivals were down more than 30 percent from the same time in 2019.

Consumer spending, the other indicator sensitive to war, remains strong despite rising inflation and growing signs of a global recession. Breaking Dawn, however, wasn't only too short to have a serious impact on shopping and spending, it also began late on Friday, continued over Shabbat and was over just a few hours after the Tisha B’Av holiday ended Sunday evening. During that time, most stores, restaurants and bars – certainly Saturday evening and night during Tisha B'Av – were closed, war or no war.

Every such conflict imposes an economic cost arising from deaths and injuries, destruction of property, and lost work and business days, not to mention the cost of the fighting itself.

An Israeli police bomb disposal expert in an Ashkelon building damaged by a Gaza rocket in May 2021.Credit: Amir Cohen/Reuters

The 11-day Operation Guardian of the Walls in May 2021 cost an estimated 8.7 billion shekels ($2.6 billion), or about 0.5 percent of gross domestic product. But to put that in perspective, according to the Tel Aviv-based Macro Center for Political Economics, over the last four years Israel has spent 14 billion shekels on four elections, not very much below the cost of fighting four short wars – and, unfortunately, so far no more decisive.

For a $520 billion economy – and one shielded from the shocks of war and global recessions by things like its current account and budget surpluses, large foreign currency reserves and thriving high-tech industry – the costs of wars and multiple elections are more than manageable.

Even the psychological impact of Israel’s wars has diminished over time. Credit rating agencies and other overseas analysts always add a proviso about Israel's “geopolitical risks,” but it’s something they have to say, much like investment pitches warn how past performance isn’t an indicator of future performance. We all know that and move on.

Israelis taking cover under a bridge at the entrance to Tel Aviv in May 2021.Credit: Gil Cohen-Magen/ AFP

One reason for that nonchalance is Israel’s proven resilience. The other is that whatever drama these mini-wars provide, their human and material damage for Israelis (in contrast to Palestinians) is tiny. Eighty percent of the cost of last year's Guardian of the Walls, for instance, was direct military spending; the cost of damaged property was a mere 315 million shekels and the loss to the economy just 1.2 billion. In Israel, the dead numbered just 14, about as many as are killed in road accidents in a typical 11-day period.

Most of the credit for that goes to the Iron Dome missile-defense system, which pays a very good return on the military’s investment of $50,000 per missile. It has saved countless lives, reduced material damage to almost nil and allowed life to go on for the most part during fighting. When the IDF’s laser-based defense system is in place, reducing the cost of each interception to $3.50, the cost-benefit ratio will be many times greater.

That said, Israel faces the very real threat of a costly missile war – not from Hamas and Islamic Jihad, which don’t have the firepower, but from Hezbollah. The Lebanese group has an arsenal of up to 150,000 projectiles ranging from mortar shells and simple rockets with a range of 200 kilometers (120 miles) to cruise missiles, drones and, most worryingly, precision guided missiles.

Hezbollah could launch 1,000 to 3,000 projectiles a day, at least during the first week of a war, overwhelming Iron Dome. Precision missiles would put especially critical assets at risk like natural gas platforms, ports, airports, and chemical and power plants, not to mention military installations.

Israel has responded to the Hezbollah danger by warning that it will launch a massive retaliation leaving Lebanon in far worse shape than Israel. But, given the state of Lebanon’s economy and infrastructure, that may not be much of a threat.

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