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Potential For Multi-Front War Increasing Economic Fears

Details
The Judean Staff
Finance

The recent high-profile eliminations of senior Hamas and Hezbollah leaders, Ismail Haniyeh and Fuad Shukr, have dramatically heightened tensions, casting a long shadow over Israel's security landscape. These strategic strikes have effectively thrust Israel into a precarious position, with the volatile resistance axis, spearheaded by Iran, now holding the initiative. The Iranian dimension is particularly critical; Supreme Leader Ali Khamenei has ominously promised severe reprisals, potentially setting the stage for a widespread regional conflagration that could ignite into a multi-front, all-out war.

Defense Minister Yoav Galant, addressing these grave developments, remarked, "We do not want war, but we are preparing for all possibilities." Israel is indeed bracing for conflict scenarios of various intensities, contemplating profound impacts on both its economic and civil sectors.

The Economic Frontlines

Israel's current state budget and economic forecasts operate under the assumption that the conflict in the south will deescalate in 2024, with the northern front remaining stable or improving. This optimistic outlook, however, could be rendered moot if a direct confrontation with Hezbollah erupts, potentially unleashing a barrage of rockets and missiles deep into Israeli territory, possibly even reaching Tel Aviv. Such a scenario would likely necessitate a large-scale mobilization of reserves and possibly an Israeli ground incursion into Lebanon. The stakes become even higher if Iran and its affiliates in Iraq, Yemen, Syria, and armed groups in Judea and Samaria join the fray, leading to a prolonged and widespread conflict against Israel.

Macroeconomic Predictions and Dire Warnings

Israel's financial institutions officially avoid publishing forecasts for severe security deteriorations. However, the Bank of Israel's latest macroeconomic forecast from July mentions that an escalation involving additional fronts could cause widespread worker and business shutdowns, infrastructure damage, and foreign trade disruptions. These disruptions could significantly harm economic activity, increase security costs, and reduce tax revenues.

In February, the Ministry of Finance outlined a "severe scenario" in the explanatory notes to the updated 2024 budget. This scenario envisioned stricter conditions regarding the intensity and duration of the fighting and its economic recovery. It projected negative growth of 1.5% for 2024 under these harsh conditions, contrasting with the base scenario of 1.6% positive growth.

Forecasts of Independent Institutes

According to an article in Calcalist by Yuval Sade and Shlomo Teitelbaum, independent public research institutes had already sounded the alarm in the early months of the conflict, emphasizing the necessity of considering severe scenarios. For instance, Professor Zvi Eckstein from the Aharon Institute for Economic Policy, collaborating with security experts Amos Yadlin and Giora Eiland, predicted extreme scenarios for a northern war as early as January 2024. These scenarios predicted negative growth of 2.5% for a limited northern conflict, while the Institute for National Security Studies (INSS) estimated that growth could range from minus 2% to minus 10% GDP in a total northern war.

Impacts on National Infrastructure and Daily Life

A senior defense official recently highlighted that an extensive war scenario would disrupt daily life throughout Israel, including central areas. "An extensive war is an entirely different scenario, much more intense than the current conflict's beginning. Israel is entering this situation from a less favorable starting point. The key question is the duration—are we talking about weeks or months?"

The defense establishment is also concerned about managing a war economy, which might involve extensive use of interceptors of all types, compounded by potential supply chain disruptions and import difficulties.

Scenarios and Long-Term Consequences

The Institute for National Security Studies recently published a document examining potential economic impacts if the current situation persists, if a comprehensive arrangement for the release of abductees is reached, or if there is an escalation in the north. In the event of a month-long war in northern Israel, the researchers predicted negative growth of between 2% and 10% in 2024, with the deficit reaching up to 15% and the debt-to-GDP ratio climbing to 80% to 85%.

The document also highlighted that the degree to which Israel can intercept threats and minimize damage to the home front, especially strategic facilities and national infrastructure, is a significant, unpredictable factor affecting the economy. Comparing Israel to Ukraine, the document noted that Ukraine experienced an economic contraction of about 30% of GDP in the first year of its war, though it acknowledged the differences in context and duration.

The Volatile Aftermath of Assassinations

Commenting on recent events, Shelah noted, "The assassination of Fuad Shukr was a correct response to the massacre in Majdal Shams. However, Nasrallah faces dilemmas, and for him to drag Lebanon into war over the killing of one of his commanders is problematic." The combination of Shukr's assassination with Haniyeh's in Tehran creates a highly volatile situation, potentially beyond Israel's control. Historically, assassinations as a policy have rarely proven effective.

The Larger Geopolitical Chessboard

Esteban Klor, an economics professor at the Hebrew University and a senior researcher at the Institute for National Security Studies, offered another perspective. "Research on the elimination of leaders of terrorist organizations generally shows that it is an effective practice in defeating such groups. However, the research also emphasizes that the effectiveness is mainly seen in newer terrorist organizations. It is doubtful whether these findings can be directly applied to Hezbollah and Hamas, as these are not classic terrorist organizations but rather semi-state entities."

Conclusion

Israel stands at a crossroads, facing potential multi-front conflicts with far-reaching economic and societal repercussions. The strategic landscape is fraught with uncertainties, and the decisions made in the coming days will shape the nation's future amidst a volatile and unpredictable geopolitical environment. As Israel prepares for all possibilities, the resilience of its economy and the fortitude of its people will be tested like never before.

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