New conflict threatens to halt Israel’s vaccine-charged recovery

Conflict in Israel threatens to derail a strong economic recovery driven by its world-leading vaccine rollout.

The growing crisis in Gaza and inter-communal riots have cast a shadow over the region. It follows Israel's ultra-rapid progress on jabs, which made it a poster child for the global fight against Covid.

Economists have said that the outbreak of violence will hammer domestic growth as well as crushing a hoped-for tourism boom driven by visitors flocking to infection-free Israeli beaches.

The International Monetary Fund had expected the economy to grow by 5pc in 2021 after 2020’s 2.4pc fall in GDP, but it is thought these figures could now be revised down.

Keren Uziyel, an analyst at the Economist Intelligence Unit, said "the swift vaccine rollout enabled the economy to open up and lockdown restrictions to be eased so domestic consumption had picked up," so "we were expecting the Israeli economy to get back to pre-Covid levels quite soon."

The country’s high-tech IT industry has long been a star performer and performed well over the past year due to rising demand for digital goods and services.

"Hamas is at the moment striking the economic centre of the country, which is around Tel Aviv and the coastal plains, and that is the area that has bounced back the quickest because it is the most prosperous," she said.

"So there will be a temporary diminution of that recovery, but given that we do not expect the conflict to be too long-lasting then the effects will be relatively short-lived."

However, unrest including riots within Israel itself is particularly worrying for the future, according to analyst Marcus Chenevix at TS Lombard.

"This is the most serious inter-communal civil unrest we’ve seen behind the green line since 1948," he said, noting that "other than all-out destructive war like Syria, the very worst kind of instability is massive civil unrest" when it comes to economic damage.

Research "shows in cases where there is widespread unrest - which is very different to protests, this is widespread riots - the economy loses output for the next five years after the event and never regains that output, it does not return to trend," he said, as small businesses in particular are likely to stay closed or stop investing after bouts of violence.

"If this unrest within Israel continues to escalate, the parallel we should be looking at in terms of economic impact is probably the Second Intifada," which put a serious dent in the country's growth.

Jason Tuvey, of Capital Economics, said the 2014 Gaza war shows what impact the latest round of rocket fire and air strikes is likely to have.

The previous conflict supported manufacturing - partly because of military production - but the consumer economy struggled as retail sales slumped.

Activity recovered quickly after the 2014 conflict, with some economists believing the same could happen again this time around.

Mr Tuvey said: "One sector which may suffer is tourism. Israel, having been the leader in vaccinations, was potentially looking at outsized gains for its tourism sector this year, given the limited choice travellers have in terms of destinations.

"We have seen large campaigns from various travel companies promoting Israel as a tourist destination. The conflict is likely to put many potential tourists off."

Foreign visitors accounted for 60pc of tourist revenues in the country before the pandemic.

British Airways, Germany’s Lufthansa and Spain’s Iberia are among airlines which have cancelled flights to Tel Aviv due to the exchanges of missiles between Israeli forces and Hamas militants.

Scott Livermore at Oxford Economics said: "Historically the economy has been quick to rebound from political conflict however a protracted conflict will disrupt activity, hitting tourism and limiting the potential gains from Israel’s extensive vaccination programmes that allow it to be appear on travel ‘green lists’ and establish travel corridors.

"Harder to quantify is the potential damage to investment and trade prospects that were expected to follow as the result of the Abraham Accords, especially in the face of an extended crisis."