Naturally, economic calculations are currently of secondary importance to the government's decision makers. In the near terms, the main efforts will be to reach what will be considered a successful conclusion, militarily and diplomatically, and will not seem like a repeat performance of the Second Lebanon War.
But when economic considerations do return to the fore, there actually will be a longing for the way the economy responded to that war's end. After one quarter, maybe less, the economic ramifications of the battles in the North were essentially forgotten, and the economy returned to the state it was in before the war, with high growth, a rising stock market, low inflation, and a low budget deficit.
The situation after the operation in Gaza is liable to be essentially different, since the macro-economic background is different. This is assuming there is, in fact, a relatively extended operation, with higher defense costs and an impact on daily life.
The budget
The first place the economic impact will be felt will be the budget. There is no way to know the direct cost of the operation that depends on the length of time it lasts, the extent of troop call-ups and equipment usage but it is clear that the government's budget for 2009, which in the meantime has not even been approved, will have to be built with the need to pay for days of fighting, call-ups of reserves, and replenishing of supplies.
In a time of falling tax collections, because of the recession, and the Ministry of Finance's refusal to consider a higher deficit, the calls for cuts in the 2009 budget will arrive precisely at a time when there will be a need for the government, which would have been able to lessen the recession's effects through the budget.
Growth
The Bank of Israel recently lowered its growth estimate for 2009 to 1.5%, the lowest since 2003. Now even that estimate seems too high. The budgetary restraint, the complications in economic activity in the South, the possible halt in foreign investment if the Gaza operations lasts longer, are all factors to take into account when calculating future growth. This time, there won't be credit to finance the return to normalcy and there won't be domestic or foreign demand to power the economy.
Inflation and interest
In contrast to what happened after previous operations, this time it cannot be assumed that inflation will rise following the fighting in Gaza. It is logical to assume that in the coming months there will be a further slowing in domestic demand, and that will lead to a further slowing of inflation. With a lack of fiscal policy to battle recession, the Bank of Israel will have no choice but to continue cutting interest rates, and approach levels that previously could have been imagined.
The result of all the issues cited above is that there may be an economy with 1% growth, an interest rate of 1%, and 0% inflation. Constructing a budget for 2009 could be a nearly impossible economic and political mission, with conflicting pressures for widening the budget from ministers, and cuts demanded by Ministry of Finance officials.
Arguments over the budget, unclear military results, or election results that point to instability will highlight to foreign and local investors the risks inherent in Israel's economy, and can lead to prolonged weakness of the shekel, even pushing the exchange rate above NIS 4/$. While a lot will depend on the way the war ends, in the near term, it is possible we will see weakness in the shekel.
Published by Globes [online], Israel business news - www.globes-online.com - on December 28, 2008
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