War is a costly business and the conflagration with Iran and its surrogates has been a severe blow to Israel’s high-tech economy. So, it is extraordinary to see that the shekel has strengthened on the foreign currency markets and shares on the Tel Aviv stock exchange are advancing.
Global investors are betting that when the bombardment of Iran is complete, Israel will be a safer place and some of the technologies deployed in the cyber campaign against Tehran and its proxies will be in global demand. The technology sector, which has been under pressure since Israel’s longest war began, will come roaring back.
The year 2025 is not a repetition of 1973 and the aftermath of the Yom Kippur War. Then an oil embargo enforced by the Gulf states sent oil prices rocketing and sparked a great inflation and recession among the world’s richest democracies.
Israel’s enfeebled economy took decades to recover from the shock. Growth in Israel has rocketed since. The country’s national wealth, GDP, is now 30 times larger and the public finances have been stabilised. This has allowed headroom – budgetary space – for a prolonged military engagement.
There has been much discussion as to whether the ayatollahs in Tehran, in a desperate attempt to cause maximum harm to the West, might seek to block the Strait of Hormuz, the narrow passageway through which Gulf oil and liquefied natural gas (LNG) supplies must pass for export. Since Israel launched its assault on the regime in Iran last week, oil prices have climbed and investors sought safe havens for their funds, such as gold.
But the energy picture is now very different from previous Middle East conflicts. Oil shipments from the Gulf still represent 20 per cent of global supplies. The biggest change, however, is that the US, the world’s second biggest consumer of energy (after China), is now self-sufficient in oil and gas because of fracking. It produces enough LNG to sign long-term export contracts. Even if it wanted to, Iran would find it much harder to destabilise Western democracies.
Fighting wars, especially those using high-technology weaponry, is enormously expensive. Re’em Aminach, a former financial adviser to the IDF chief of staff, estimates the bill for offensive and defensive operations against Iran at $725 million (£537 million) per day. The longer the war goes on, the bigger the black hole it creates in Israel’s public finances. That is not where the fiscal and economic damage stops. The indirect costs, such as those associated with mobilising troops, calling up reservists, a disrupted labour market and reconstruction from rocket damage, are mounting. It is estimated that the ongoing cost of the Gaza campaign, now in its 20th month, is $55 billion. Together with sacrificed investment and growth it could reach $400 billion over a decade – a bitter and heavy blow.
Ahead of the Iran conflagration, Israel’s debt rose by 17.9 per cent as a result of battles in Gaza, against Hezbollah in the north and a military crackdown in the West Bank. It now stands at 67.9 per cent of GDP, up from 61.5 per cent at the end of 2023.
Nevertheless, in comparison with most Western democracies it is relatively modest and easily financed. The debt to GDP ratio in the UK is close to 100 per cent, in the EU (Israel’s biggest trading partner) 89 per cent and in the US 124 per cent – and that’s before the Trump tax cuts presently trundling their way through Congress.
Israel’s 2025 budget set a limit for borrowing of 4.9 per cent of national output. The costs associated with the Iran war will blow that out of the water, so Israeli citizens and companies can expect a diet of tax increases and further budget cuts with the aim of closing the gap. Normally, a country at war could expect to see its global credit ratings slashed, making it harder to sell bonds and borrow on international markets.
Fitch Ratings, though, has maintained Israel’s “A” rating, arguing that the short-term impacts are manageable. A prolonged conflict would be a very different kettle of fish and could undermine Israel’s hard-won credibility in financial markets.
The country’s soaring borrowing and debt is less of a problem than in much of the West because of the country’s growth prospects. Despite the long period of mobilisation, the Finance Ministry projected (pre-Iran) growth this year of 3.6 per cent, a downward revision from 4.3 per cent. Economic expansion means higher tax revenues, which ease the pressure on the budget.
Israel’s war on many fronts has hurt the cashflow into the country’s vibrant tech eco-system. At its peak earlier this decade, new investment reached $6.1 billion and Israel was seen by venture capitalists as the second-best place to back new cyber after Silicon Valley. Last year, inflows plummeted to $1.15 billion amid nervousness among international funders and techies about the reputational damage caused by Gaza.
Michael Eisenberg, Israeli founder of high-tech venture capital fund Aleph, believes the present Iran conflict is a signal moment for Israel’s economy. Once the dark pall of Iran’s terrorism and nuclear threat has been lifted, there could be a golden age for Israel’s pioneering inventions. Among the key sources of the country’s tech genius are the innovations generated by the military, the air force in particular, and the security agencies.
“Israeli entrepreneurs are waiting for the conflict to end to back the innovation used in subverting Iran,” Eisenberg told the US finance channel CNBC. He suggests that the precise technologies used to track Iran’s leaders are groundbreaking and have great commercial application. The development of financial technology, capable of penetrating and defending against money laundering, will also be in great demand. The revival will take time, however, especially when so many young digital-savvy telecoms engineers, cyber experts and scientists are in uniform.
Prosecuting a multi-front war, using advanced weaponry and defences, has been made possible by an era in Israel of high growth, fiscal restraint and a tough control on prices by the independent Bank of Israel, which has a global reputation for sound monetary management. The Jewish state’s longest war, now even directly confronting Iran, has been tough for Israeli citizens. But as far as the future of the country’s bustling economy is concerned, there are good reasons to be confident that the darkest hour is before dawn.
Alex Brummer is City Editor of the Daily Mail
