After more than two years of multi-front conflict, Israel unfortunately already has considerable experience in how its economy responds to security confrontations. One month into Operation "Epic Fury" we can begin to understand the direction things are heading. These are not yet final conclusions, but several clear patterns are already emerging.
The first is that the Israeli economy continues to demonstrate resilience. The second, no less important, is that resilience does not mean there is no damage. The economy is not collapsing, but it is certainly taking a hit.
Uncertainty has risen sharply, the fighting is being felt across all sectors, and the impact on activity is evident on both the demand and supply sides. This is reflected in a sharp drop in consumption at the start of the operation, damage to tourism, worker absences, reserve-duty mobilization, and disruptions to routine activities.
In this sense, the economy’s initial response is already quite familiar. At the onset of a security event, there is a sharp slowdown, people spend less, businesses are affected, and real economic activity weakens almost immediately.
But if there is one thing the past two and a half years have taught us, it is that the Israeli economy also knows how to recover. Not without cost, and not without damage, but with a relatively quick ability to return to economic routine. This applies to consumption, business activity, and financial markets alike.
From here on, the question is no longer just what has happened, but how it will end. If we are drawn into a war of attrition, the economic cost will continue to accumulate. If we see a broader escalation, the impact will mainly come through the energy market, inflation, and overall activity.
On the other hand, if there is a quicker resolution and a decline in tensions, the Israeli economy could return to its trajectory relatively quickly, along with a drop in the risk premium and an improvement in the economic environment.
As for inflation and interest rates, the risks currently still lean upward. The longer the fighting continues and the higher the risk premium remains, the more sensitive the shekel becomes, while energy prices add further pressure. These are precisely the kinds of factors that could delay the path of interest rate cuts or at least make it much more gradual than previously expected. Even if we see easing later, in the short term, the environment of uncertainty dictates caution.
And what about the stock market? Here lies perhaps the most interesting point. Despite the security situation, the local market has shown relative strength, especially compared to global markets. In other words, investors are not looking only at the immediate risk, but also at the day after.
They see an economy that has already demonstrated impressive recovery ability over the past two and a half years, a strong high-tech sector, defense industries that may benefit from increased demand, and the possibility that the risk premium will eventually decline. In other words, the market is already beginning to price not only the cost of the war, but also the potential of the period that follows it.
Ultimately, investors are also looking at the economy itself- its innovation, the depth of its business sector, and its ability to return to its path relatively quickly even after shocks. True, the risks are still here. The end scenario is not yet known, security costs are heavy, and uncertainty is far from disappearing.
But if there is one lesson that can be drawn so far from Operation “Rising Lion”, it is that the Israeli economy is once again proving that it may be hurt, but it does not break. It has a strong capacity for recovery, solid growth engines, and a capital market that is already signaling it sees beyond the current event. For those looking at Israel over the long term, this is a point that is hard to ignore.
The writer is the Chief Economist at Phoenix Financial.