Businesses, Policy Makers Worry Israel Faces War of Attrition

As truce fails, shoppers stop buying, plants curtail output.

Bloomberg

From factory owners in the south to café denizens in Tel Aviv to policy makers in Jerusalem, Israel began this week to grapple with the economic implications of what could be a protracted war of attrition against Hamas in the Gaza Strip.

“A situation in which we’re experiencing a ‘drizzle’ of rockets will be very hard to endure,” said Mati Bavli, CEO of Magen Eco Energy, a solar panel manufacturer based on Kibbutz Magen, close to the Gaza border. “When we’re in a time of war or of calm, the situation is clear. A war of attrition like this isn’t clear.”

Most of the company’s 100 employees are still reporting to work despite the resumption on Tuesday of rocket fire from the Gaza Strip, even though many must come from as far away as Be’er Sheva, Bavli said. “Right now most of our employees feel obligated to come to work, but there’s a limit to their ability to cope with this.”

The 10-day cease-fire that unraveled on Tuesday had enabled Israeli businesses and consumers to resume their prewar activities, based on the assumption that Israel and Hamas were headed for a more permanent truce. Factories resumed their normal levels of production, cafés that had been closed during the fighting reopened and shoppers started making up for their weeks of retail abstinence.

Bank of Israel Governor Karnit Flug estimated that Operation Protective Edge had cost the economy about 5 billion shekels ($1.4 billion) in output, just 0.5% of gross domestic product, and that the 2014 national budget was capable of absorbing the direct costs of the fighting. (See story this page.)

But sources told TheMarker on Thursday that Flug planned to convene a meeting of the central bank’s top officials within a few days to reassess the costs of the war. The bank now assumes that the fighting will continue, if at a lower intensity than before the abortive cease-fire, taking a further toll on economic output and the state budget.

“After five days of cease-fire, we’re back in a very problematic situation,” said Tamir Simchi, CEO of Michsaf, a maker of kitchenware at Kibbutz Nir Am, near the border with Gaza. “For the last two days we’ve had sirens and rockets and the army’s responses. The factory is again operating part-time, on the smallest possible shifts.”

On Wednesday, only about 20 of the plant’s 45 employees reported to work. Still, that was better than at the peak of the fighting, when 80% of the staff often stayed home.

South hit hardest

The resumption of fighting has hit the south the hardest because it is again experiencing the brunt of the rocket attacks. But all over, Israel this week saw a big drop in business.

Retail Information Systems, which monitors sales per square meter at some 2,000 stores, reported an 8.5% decline in turnover Tuesday from last week, when the cease-fire was observed.

Sales were down 12% in the south, 6% in Tel Aviv and 7% in central Israel as a whole.

Danny Mishel , CEO of the Aroma Israel café chain, told TheMarker that sales at his cafés in the southern cities of Ashkelon and Ashdod were down as much as 40%.

“I was speaking with our franchisee in Ashkelon and he told me it would be very difficult for him to continue like this for long — one day he needs his staff to come in and the next day not. We thought this whole thing was behind us and now it’s back again. It’s very discouraging,” Mishel said.

Growers also stand to lose big if the fighting continues through October, when the next farming season starts, Eshkol Regional Council head Haim Yellin warned. Damages, he estimated, could reach 1 billion shekels.

“We’re talking about a long-term economic impact, and not just direct damage, for which we get compensation [from the government]. Contracts with European customers will have to be cancelled — multiyear contracts — and that could destroy the entire area,” Yellin said.

He said that Israeli army tanks had flattened a lot of farmland in the area, adding that he was also worried that many of the foreign farmworkers might leave the country if the fighting dragged on.

The prospects of a longer war is also complicating the treasury’s preparation for the 2015 budget, which is already far behind schedule. The Finance Ministry and the Prime Minister’s Office have agreed to hold the first cabinet session on the spending package on September 11, two months later than usual.

Cabinet members will be asked to approve the defense establishment’s demand for an additional 9 billion shekels this year to cover the costs of Operation Protective Edge and another 11 billion shekels for 2015.