In late September, Israel’s finance minister, Bezalel Smotrich, said that while the country’s economy was under pressure, it remains resilient.

“Israel’s economy is bearing the brunt of the longest and most expensive war in the country’s history,” Smotrich said on Sept. 28, a day after Israeli airstrikes killed Hezbollah leader Hassan Nasrallah in Beirut. However, the fronts that Israel has now opened are many, and fears that the conflict is likely to spread to the wider region have raised fears that the economic costs will rise for both Israel and other Middle Eastern countries.

“If the recent escalations turn into a longer and more intense war, it will have a heavier toll on (Israel’s) economic activity and growth,” Karnit Flug, a former governor of Israel’s central bank, told CNN on Oct. 1.

Also, Lebanon’s economy could shrink by as much as 5% this year due to the cross-border attacks between Hezbollah and Israel, according to BMIa market research firm owned by Fitch Solutions.

But Israel’s economy could shrink even more than Lebanon’s, according to the Institute for National Security Studies at Tel Aviv University.

Even in a more favorable scenario for Israel, researchers see Israel’s per capita gross domestic product – which in recent years surpassed that of the United Kingdom – falling this year as Israel’s population grows faster than the economy and livelihoods level decreases.

Before the October 7 attack and the ensuing Israel-Hamas war, the IMF predicted that Israel’s economy would grow at 3.4% this year, an enviable percentage. But now, economists’ forecasts range from 1% to 1.9%. while next year, growth is also expected to be weaker than previously forecast. But Israel’s central bank is unable to cut interest rates to breathe life into the economy because inflation is accelerating, driven by rising wages and soaring government spending to finance the war.

“Long-term” economic damage

The Bank of Israel estimated last May that the cost of the war will total 250 billion shekels ($66 billion) until the end of next year, including military and political costs, such as housing thousands of Israelis who were forced to flee their homes in the north and south. This is roughly equivalent to 12% of Israel’s GDP.

That cost looks set to rise further as tougher fighting with Iran and beyond, including Hezbollah in Lebanon, strains the country’s defense sector while delaying the return of Israelis to their homes in the country’s north.

Smotrich, the Israeli finance minister, is confident that Israel’s economy will recover once the war is over, but economists worry that the damage will be much longer lasting from conflict with the consequences of war being visible for a long time.

Flug, a former governor of the Bank of Israel and now vice president of research at the country’s Democracy Institute, argues that there is a danger that the Israeli government to cut investment to free up resources for defence.

“This will reduce the potential growth (of the economy) in the future,” he said.

The researchers of IInstitute of National Security Studies they are equally disappointed. Even a withdrawal of Israeli troops from Gaza and a return to calm on the border with Lebanon would leave Israel’s economy in a weaker position than before the war, they said in a report in August. “Israel is expected to suffer long-term economic damage regardless of the outcome,” they wrote.

The conflict ehas doubled Israel’s budget deficit to 8% of GDPfrom 4% before the war.

Government borrowing has soared and become more expensive as investors demand higher yields to buy Israeli bonds and other assets. Multiple downgrades of Israel’s credit ratings by Fitch, Moody’s and S&P are likely to further increase the country’s borrowing costs.

In late August the Institute for National Security Studies estimated that just one month of “high-intensity warfare” in Lebanon against the militant group, with “intensive attacks” in the opposite direction damaging Israeli infrastructure, could blow Israel’s budget deficit to 15% and its GDP to shrink by up to 10% this year.

Uncertainty “the biggest factor”

Coface BDi, a major business analytics firm in Israel, estimates that 60,000 Israeli companies will close this yearfrom an annual average of about 40,000. Most of them are small with up to five employees.

“Uncertainty is just bad for the economy, bad for investment,” said Avi Hasson, CEO of Startup Nation Central, a nonprofit that promotes Israel’s tech industry globally.

In a recent report, Hasson warned that the remarkable resilience of Israel’s tech sector so far “will not be sustainable” in the face of uncertainty created by the protracted conflict and the government’s “disastrous” economic policies.

Other sectors of Israel’s economy, though less important than technology, have been hit much harder. The agriculture and construction sectors struggling to fill the gaps left by Palestinians whose work permits have been suspended since October last year; pushing fresh vegetable prices sky high and leading to sharp decline in construction.

Tourism ehas also been hit hard with arrivals plummeting this year. Israel’s Ministry of Tourism estimated that the decline in foreign tourists translated into 18.7 billion shekels ($4.9 billion) in lost revenue since the beginning of the war.