The day after October 7, 2023, Ashdod port employees returned to their posts, as they do every morning. Located in the south of Israel and a few dozen kilometers from the Gaza Strip, Ashdod hosted 40% of the country’s maritime trade. While several maritime freight companies declared cases of “force majeure”, limiting their services, the port saw its volumes collapse by almost half in the last quarter of 2023. A year later, “the activity is almost back to normal,” observes Shaul Schneider, executive chairman of Ashdod Port Company. “Companies that had suspended deliveries returned in March and we saw a gradual increase in trade as freight companies adapted to the situation,” he adds.
The port of Ashdod is one illustration among others of the astonishing resilience of the Israeli economy. Added to the security situation in the country is a bleak economic picture: growth is at half-mast, the budget deficit has widened and the downgrading of the credit rating by the Moody’s rating agency on September 27, sounds as a new setback for the Hebrew State. However, according to the Israeli Minister of Economy and Industry, Nir Barkat, this assessment must be put into perspective. “Over the course of wars and episodes of violence in our region, we have learned that there is generally a slight decline during war, but that an economic rebound occurs as soon as it ends,” he confides to L ‘Express.
Imports in decline
Israel, dependent on foreign trade, saw its merchandise imports plunge by 15% in 2023 and by almost 8% in the first eight months of this year. Part of this decline can be attributed to the decline in domestic demand, says Eran Yashiv, professor of economics at Tel Aviv University and member of the Center for Macroeconomics at the London School of Economics. “Between October and December 2023, nearly 300,000 men were mobilized in the army and many people were displaced from the border with Lebanon. These movements led to a drop in consumption, and therefore a reduction in imports of goods and services,” explains the academic.
At the same time, instability in the Red Sea, linked to attacks by Houthi rebels, has made the transport of goods to Israel more dangerous. Transit times have increased by several weeks, with many ships now choosing to pass through the Cape of Good Hope. And these delays have been reflected in prices, with the Israeli inflation rate oscillating between 2.5 and 3.7% since the start of the conflict.
The crisis has particularly affected the agriculture and construction sectors. The latter were hit by a labor shortage at the start of the conflict, when Israel no longer authorized the entry of Palestinian workers, who were numerous in the agricultural sector. As for the high-tech sector, which supports the country’s economy, it suffered a drop in fundraising of 33% in the last quarter of 2023 compared to the previous year. “If the decline in investment continues and is accompanied by a brain drain, the tech sector could suffer greatly. This is a major problem,” worries Professor Eran Yashiv.
The final blow for the Jewish state: Turkey, which supplied Israel with a wide range of goods, notably metals and construction materials, turned its back on it last spring. Ankara demanded, for the resumption of exchanges, a permanent ceasefire between Israel and Hamas and an uninterrupted flow of humanitarian aid to Gaza. A few months later, Colombia followed suit, announcing to suspend its coal exports to Tel Aviv.
Adjusting to the new reality
Faced with Turkey’s decision, the Israeli business world has not given up. “At the time, business leaders told me: ‘We know how to handle this situation and we don’t need help from the government,'” Economy Minister Nir Barkat recalls.
If, officially, commercial relations with Turkey have been suspended, business is now taking alternative routes, observes Elad Barshan, founder of the company SlickChain, a digital platform for international vehicle trade. “Turkish goods are diverted to third countries such as Greece, Slovenia and Georgia, from where they are re-routed to Israel. It is easy to change shipping documents, allowing trade to continue safely. discretion,” he explains. It is difficult, however, to quantify these flows due to a lack of statistics on the origin of goods when they pass through a third country.
From June, Israeli trade in goods with the European Union increased in proportion to the commercial decline between Ankara and Tel Aviv, notes Noah Trowbridge, maritime risk analyst at Dryad Global. “The transit of foreign goods – notably Azeri oil – from Turkey to Israel does not seem to have been particularly affected by these sanctions,” he adds.
Maritime freight has also adapted to the persistent threat from the Houthis, with shipowners now paying risk premiums on the goods transported. These premiums amount to between 0.25% and 0.65% of the insured value, depending on the Israeli ports served, or twice as much as for the port of Benghazi, in Libya, notes Elisabeth Braw, senior researcher at the Atlantic Council. “Continuing trade with Israel is not a political position,” she emphasizes, “it is a commercial decision. Many companies continue to sail to Israeli ports because they believe it is worth taking. this risk and pay a premium.”
Over the months, the Israeli agricultural sector has gotten back on its feet. It is currently producing 95% of its pre-war volumes, says Minister Nir Barkat. Volunteers helped in the south of the country – the hardest hit by the strikes – and workers arrived from abroad. Result: Israel managed to increase its exports of fruit and vegetables to the European Union, in 2023 as in the first part of 2024. The tech sector, finally, slowly recovered, showing an increase in fundraising in the second quarter of 2024. In total, Israeli firms raised $8.8 billion between October 7, 2023 and August 15, 2024, with a growing share linked to cybersecurity companies.
Strong partners
The Israeli economy was able to withstand the conflict thanks to several long-standing allies. Although the overall volume of its trade with the Jewish state has seen an inflection, the European Union has retained its rank as the leading trading partner, increasing, for example, its exports of metals and industrial chemicals over the first eight months of this year. . Trade which is expected to increase further, Israel having launched a reform to harmonize regulatory standards on its imports. Israeli merchandise exports to the United States increased by 14% between June and August, with large volumes of electronic equipment and chemicals. The country is also cultivating its relations with India, a loyal buyer of Israeli diamonds, and is continuing its trade with the United Arab Emirates, boosted by the signing of the Abraham Accords in 2020.
China – its third largest trading partner – saw its exports to Israel increase by 13% between June and August. Beijing supplies, among other things, electronic equipment and textiles, and has established itself on the local electric vehicle market. “The desire to seek partners other than Turkey could be one of the reasons for this increase in Chinese exports,” analyzes Tomer Fadlon, associate researcher at the Institute for National Security Studies.
On the geopolitical level, China nevertheless appears close to Israel’s enemies and is slow to condemn Hamas and Hezbollah. But this hostility is not reflected in trade volumes between the two countries. “China adopts this diplomatic posture not because it is against Israel as such, but because Israel is a close ally of the United States, its great rival on the world stage,” notes Tomer Fadlon. Nir Barkat wants to be pragmatic: “As Minister of the Economy, I focus on the cost of living in Israel. As long as China continues to provide us with cheap products under honest conditions, that suits us.”
Be careful
A year ago, Tomer Fadlon thought the conflict would have a much greater impact on the Israeli economy. “But no one knows how long this resilience will last, especially in view of recent events,” asks the researcher. Iranian missile attacks on Israel and the intensification of the conflict in Lebanon are further clouding the macroeconomic outlook.
Caution therefore remains in order. “We continue to recommend to our clients not to transit through the Red Sea until a lasting ceasefire agreement is signed between Israel, Hamas and Hezbollah,” says analyst Noah Trowbridge. “Until then, risk premiums for freight are set to increase, particularly given the current escalation,” he warns. A context which also modifies the balance within the European Union. If the majority of the Twenty-Seven remain reluctant to impose sanctions on Israel, Ireland and Spain have asked to return to the free trade agreement signed in 1995 with the country. A first.
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