Excerpt from the "Bank of Israel – Annual Report for 2014" to be published soon: The effect of military conflicts on economic activity
Excerpt from the "Bank of Israel – Annual Report for 2014" to be published soon: The effect of military conflicts on economic activity.
Excerpt from the "Bank of Israel – Annual Report for 2014" to be published soon:
v The loss of GDP deriving from Operation Protective Edge is estimated at around NIS 3.5 billion, about 0.3 percent of annual GDP. This negative impact was caused by the demand side, while the supply side maintained relative stability.
v The decline in demand negatively impacted tourism services and private nondurable consumption. The negative impact on tourism is characteristic of military conflicts, though the decline in nondurable goods consumption was unusually formidable.
v On the supply side, Israel’s economy was more resilient than in previous conflicts, as indicated by the stability in export data and in the Industrial Production Index.
In July-August, Israel’s economy dealt with 50 days of hostilities during Operation Protective Edge. This conflict joins several others that have been waged in recent years, including Operations Pillar of Defense (2012) and Cast Lead (2008), and the Second Lebanon War (2006). This box will review major aspects of the direct economic impact of Operation Protective Edge while comparing those aspects with the parallel ones in the conflicts mentioned. It should be noted at the outset that although the Second Lebanon War took place on the Northern front and not in the Gaza Strip, in contrast to the other episodes of hostilities, it serves as the most appropriate basis for comparison, because it lasted for 34 days and was also waged in July-August. In contrast, Operation Pillar of Defense lasted for only 8 days, and in contrast to the Second Lebanon War it did not include a ground incursion, while the economic ramifications of Cast Lead are hard to distinguish from those of the global crisis that broke out in 2008.
Among the various industries in the economy, tourism is adversely impacted most severely by military conflicts. All the conflicts had a clear negative impact on the industry, reflected in a decline in several indicators, including the number of tourist and visitor entries, the number of overnight hotel stays by tourists, the revenue of the food and hospitality services industry, and revenues of Israeli airlines. The source of the negative impact is in tourism from abroad, and it derives from tourists responding rapidly and sharply to the deterioration in the security situation, while Israeli tourism is much less sensitive to that. The harm caused to tourism services exports is not only during the actual days of conflict, but also, and primarily, because the negative impact continues beyond them. Activity does not recover immediately, and returns to its level of the period preceding the fighting only after about a year (Figure 1). During times of hostilities, a decline is also seen in outgoing tourism, but this recovers rapidly and already returns to its pre-conflict level in the following quarter.
It is estimated that the loss suffered by tourism services exports in 2014 due to Operation Protective Edge reached NIS 2 billion, about 0.2 percent of annual GDP. However, it should be noted that the tourism industry in Israel is of greater importance than just its proportion of GDP, as its share of total jobs in the economy is larger, and it mainly employs workers who earn low wages and do not have many employment alternatives. A positive aspect is that despite the extended fighting and the temporary halt in operations of some foreign airlines at Ben-Gurion Airport, tourism was not negatively impacted to a greater extent than during the Second Lebanon War.
Private nondurable-goods consumption
Military conflicts also negatively impact private nondurable-goods consumption, primarily of services, a component that represents about 40 percent of nondurables consumption and about 20 percent of GDP. Private consumption of services increases by an average rate of 1 percent per quarter, but during Operations Cast Lead and Pillar of Defense it grew by a lower rate, during the Second Lebanon War it remained essentially unchanged, and during Protective Edge it contracted (Figure 2). This phenomenon apparently derives from a decline in two major components of services consumption—transportation services, and restaurants and hotels. An indication can be seen in the summer of 2006 as fuel consumption declined markedly, and in the summer of 2014 as it declined even more sharply. Likewise, during Protective Edge a decline was seen in the number of Israeli tourist overnight hotel stays and a negative impact on trade (based on credit card sales), but these phenomena were not observed during the Second Lebanon War. It is plausible that the response this past summer was more severe because the hostilities were protracted and the rockets’ range expanded to include major population concentrations in the center of the country. The GDP loss attributed to private consumption was estimated at about NIS 1.5 billion, most of which derived from a decline in services consumption, and a minority of which derived from a slowdown in the growth rate of food, beverages, and tobacco consumption. Private consumption recovered nearly immediately, and the negative impact was entirely in the third quarter.
Overall industrial production is not especially sensitive to military conflicts, but when examining the Industrial Production index by technological intensity, differences can be found in the groups’ responses. While a decline during the conflict was not seen in high technology industries, a different picture emerges from other manufacturing industries (Figure 3).
There was a sharp decline in medium-high technology industries during the Second Lebanon War, deriving primarily from a marked negative impact on activity of the oil and chemicals industries which are concentrated around Haifa. Medium-low and low technology industries remained stable during the Second Lebanon War and suffered a moderate negative impact during Protective Edge. As for low technology industries, its representation in northern Israel is double its representation in the South, and nonetheless, according to the Industrial Production index, it was negatively impacted precisely during Protective Edge. This was due to the decline in activity in the food, beverages, and tobacco industry. The negative impact on medium-low technology industries derived primarily from the adverse effect on two industries—metals and production of goods based on non-metallic minerals. Overall, industrial production remained relatively stabile during Protective Edge, and its negative impact on GDP was only marginal.
Goods and services exports
The tourism industry, as noted, suffers the most significant adverse economic impact caused by hostilities, and this is reflected in services exports. Other export data indicate that during Protective Edge, the economy was more resilient than during previous episodes of hostilities (Figure 4), in contrast to the picture that emerges from services consumption (Figure 2).
Nonetheless, it should be noted that the sharp decline during Cast Lead should probably be attributed to the global economic crisis, and the short duration (8 days) of Pillar of Defense points to it having only a marginal effect on the decline in exports during the fourth quarter of 2012. In contrast, the Second Lebanon War, as noted, serves as a relatively suitable basis for comparison with Operation Protective Edge: while in the third quarter of 2006, goods exports excluding diamonds contracted by 5.8 percent, in the parallel quarter of 2014 they grew by 1.1 percent (similar to the multiyear average). A similar scenario, though more moderate, can be observed as well in total goods and services exports (excluding diamonds). It is difficult to attribute the contraction in exports in 2006 to the operations of the seaports, since even though container traffic at the Haifa port declined sharply that summer, a marked shift to the Ashdod port compensated for that. In addition, it appears that part of the decline in exports in 2006 was a correction to the rapid growth in the previous quarter. It can therefore be concluded that the military conflicts discussed had only a marginal effect on goods exports.
Total GDP loss
Operation Protective Edge caused an estimated loss of NIS 3.5 billion, about 0.3 percent of annual GDP. This loss is slightly lower than the lower bound of the estimated loss caused by the Second Lebanon War, 0.35–0.5 percent of annual GDP. The negative impact derives from a decline in demand, which is reflected in tourism services exports and nondurables consumption, while the supply side, in contrast, remained relatively stable. It should also be noted that military conflicts increase the public expenditure on defense, but it is difficult to quantify its effect on GDP since it is not clear to what extent the increase is at the expense of public civilian expenditure.
 For perspectives on the effect of Operation Protective Edge on financial market indicators, see the Bank of Israel’s Financial Stability Report of January 2015.
 Shaharabany, R. and Yigal Menashe (2011). “The Hotel Market in Israel”, Discussion Paper Series 2011.04 (in Hebrew) (Bank of Israel); Shaharabany, R. (2014) “The impact of terrorism, Israel’s image and economic variables on different types of incoming tourism”, Discussion Paper Series (Bank of Israel).
 Industrial production for the food, beverages, and tobacco industry remained stable in the summer of 2006. This is surprising, as the share of this industry in the North is markedly greater than its share in the South. The explanation does not seem to be based on different patterns of absence from work, as the index of employees’ actual work hours in this industry moved similarly (a slight decline) during the two conflicts.
 The base metals and production of metal products in assembly, excluding machinery and equipment.
 An alternative explanation for the decline is the shekel’s strengthening against the dollar during that same quarter.
 In the second quarter of 2006, there was an atypical increase, of 10.2 percent, and in the corresponding quarter of 2014 there was a decline of 4.4 percent (Figure 4).