Israel's Economy Grapples with War's Impact: Businesses Adapt Amid Uncertainty

One year after the Hamas-led assault on Israel, the nation's economy is grappling with significant challenges. The conflict has led to widespread business disruptions, increased defense spending, and a sharp decline in tourism. Despite these obstacles, many Israeli entrepreneurs are finding ways to adapt and persevere.

Shelly Lotan, a food-tech entrepreneur in northern Israel, exemplifies the struggles faced by many businesses. Her year-old start-up was forced to relocate due to missile threats, and investments have slowed considerably. Lotan's experience reflects the broader economic impact of the ongoing conflict.

Israel's economy, often referred to as the "Start-up Nation" due to its high concentration of technology companies, has shown resilience in past conflicts. However, the current situation presents unprecedented challenges. The country's GDP has contracted sharply, and its credit rating has been downgraded. Thousands of businesses have closed, and many jobs are being moved offshore.

While Israel's robust high-tech industry has remained relatively stable, other sectors have been severely impacted. Construction and agriculture, which previously relied heavily on Palestinian workers, have been hit hard. The tourism industry has experienced a dramatic 75% decline, leaving many businesses in popular destinations like Jerusalem's Old City struggling to survive.

"It feels like nighttime, and we don't know when morning will come."

The Israeli government's focus on the war effort has led to criticism from some economists and business leaders. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research, warns that "the economy is in serious danger unless the government wakes up." The allocation of funds to coalition partners, including subsidies for ultra-Orthodox religious studies, has been a point of contention.

Despite these challenges, many Israeli entrepreneurs are finding ways to adapt. Sagi Eliyahu, CEO of software company KMS lighthouse, has accelerated hiring outside the country, adding 30 employees in Portugal and Serbia over the past year. This strategy reflects Israel's strong international connections in the tech sector, with the country having more companies listed on the NASDAQ outside of North America and China than any other nation.

The massive call-up of reservists has also impacted the workforce, with many professionals balancing military service with their careers. Idan Ben-David, a 28-year-old entrepreneur, runs his AI start-up while serving four nights a week with Israel's Air Force. This dedication to both national service and innovation is characteristic of Israel's resilient business culture.

Israel's reputation as a global leader in various tech fields, including cybersecurity, medical technology, and water technology, may help cushion some of the economic blow. The country's high rate of patent filings and significant investment in research and development could provide a foundation for future growth once the conflict subsides.

However, the immediate future remains uncertain. With defense spending projected to reach $67 billion through 2025 and ongoing security concerns, the Israeli economy faces significant headwinds. The resilience and adaptability that have characterized Israel's "Start-up Nation" ethos will be put to the test as the country navigates these challenging times.