War clouds Israel’s rosy economic forecast as experts warn of deeper risks
The recent economic forecasts from the Bank of Israel and the Finance Ministry have painted an unexpectedly optimistic picture for Israel, predicting sharp growth, rising living standards, and low inflation over the next two years. However, this rosy outlook is clouded by the ongoing war and the persistent economic strain. While the forecasts are reassuring, they fail to address the deeper risks and uncertainties that could significantly impact the country's economic stability.
One of the key concerns is the potential for prolonged conflict in Lebanon. If the war extends, as it has in the past, it could have severe consequences for the Israeli economy. Additionally, reports in the foreign press suggesting that Iran is making gains in the conflict could further destabilize the region. The possibility of the Trump administration withdrawing from the conflict due to political and economic harm is also a significant risk.
The reluctance of Israel's economic community to outline worst-case scenarios is understandable, given the history of overly pessimistic projections that have damaged economists' credibility. However, it is crucial to present not only baseline scenarios but also harsher alternatives, including the high cost of protracted conflict. The truth is that Israel is a resilient economy, but resilience is not infinite.
The impact of the war on the global economy is already being felt. The global commodity price index has risen 17% since the war began, with container shipping costs up 37%, synthetic rubber and sulfur 40%, and polyethylene 33%. Electricity prices have surged in Europe, and gas prices are rising too. Inflation in the United States and Britain could reach 4.2% and 4%, respectively.
Israel will not be immune to these global economic shocks. More than 80% of imports arrive through the ports of Ashdod and Haifa, and some shipping companies are already reducing their frequency due to security risks. While the Bank of Israel forecasts only a modest rise in inflation to 2.3%, there is a significant inflation risk, and government fiscal policy and rising transport costs could lead to broad price increases.
The damage to infrastructure across the region positions Israel as an attractive strategic partner in sectors such as logistics, cybersecurity, semiconductors, and artificial intelligence. Israeli companies could benefit from increased demand in these sectors, with potential contracts worth $10 billion to $15 billion. However, the country's energy vulnerability remains a significant concern.
The natural gas framework has given Israel almost complete energy independence, but it has not provided energy security. The concentration of natural gas platforms in Israel's economic waters in the Mediterranean makes them vulnerable to attacks, damage, and accidents. This concentration worries Prof. Arie Zaban, who emphasizes that the continuous supply of electricity for the production and maintenance of artificial intelligence relies on server farms, data centers, and supercomputers that consume enormous amounts of energy.
To address these risks, Zaban suggests diversifying, decentralizing, and storing energy sources. Diversification is the most important, and the transition to solar energy must be urgently expanded, not only for climate reasons but also for security reasons. Unlike natural gas platforms concentrated at sea, solar energy production can be spread across the entire country, creating energy security even in emergencies.
In conclusion, while the economic forecasts are reassuring, they fail to address the deeper risks and uncertainties that could significantly impact Israel's economic stability. The country must take proactive steps to diversify its energy sources and decentralize its energy production to ensure energy security and resilience in the face of ongoing conflicts and global economic shocks.
