Israeli-based companies and businesses are bracing for another challenging economic year, after enduring, in 2023, months of political unrest, a global slowdown that affected the country’s big-tech and startup sector, and the outbreak of war in Gaza.
Israel’s economy has already been affected by the war with the Hamas terrorist group following the horrific attacks on Israel that took place on 7 October 2023. According to Israel’s Bureau of Statistics, economic output has declined by 19.4% in the final three months of last year, more than analysts expected and higher compared to the same period of 2022.
The slower economic activity was partially driven by a lack of workers, as many were called up for military duty, or the temporary closure of businesses situated in areas affected by the ongoing conflict between Israel and the Gaza based terror group.
Many in the tech sector are sharing a pessimistic outlook regarding the sector's growth and activity in the months ahead as the war continues to drag on, and companies are struggling to fill open positions due to many employees being called up for reserves or positions being frozen until conditions have improved. This without taking the leftist protests threatening to destroy the economy.
Any recovery made in the tech sector has now been uprooted in the months following the outbreak of the unexpected war. Unsure of how long the conflict will continue, some companies have since started hiring again in the hopes of filling open positions, or finding suitable temporary replacements for those called up for duty.
Challenges Facing Israel As War Continues
Israel’s economy has taken the hardest knock following the terrorist attack from Hamas in October 2023. Most of the country’s economic drivers witnessed a strong decline in activity, as consumers pulled back spending and private funding deals slipped even further.
The Bureau of Statistics found that private consumption was down roughly 26.9 percent during the last three months of the year. Other activities such as business investment were down a staggering 67.8 percent, exports fell 18.3% and imports into Israel were down roughly 42 percent.
The statistics office has said that Israel’s economy grew by 2 percent for the year 2023, however, this is a decline compared to the 6.5 percent economic growth experienced during 2022.
With the war efforts now spilling well into 2024, economists are concerned that the ongoing conflict will have a larger impact on the country’s economy, and sectors such as technology and tourism are taking the biggest hit.
With tens of thousands of border communities displaced in both the north and the south, businesses there shut, employees being called up for military reserve duty and with the tourism, hospitality, and tech sectors perhaps bracing for the biggest impact, both the government and economy have now hit a crossroads.
Israeli Workforce Remains Committed To Their Duties
As the war pushes forward, droves of employees continue to remain absent from work, and companies are finding it more and more challenging to find suitable talent to fill open positions, at least in the industries that are still hiring. That is one of the reasons many of the IDF reservists have been sent home to return to work.
In one report by Shmuel Abramzon, Chief Economist for Israel’s Finance Ministry, nearly 18 percent of the country’s workforce were absent from their jobs in October 2023 following the outbreak of conflict with Hamas terrorists.
According to the chief economist’s report, nearly 764,000 Israeli employees were absent from work in October 2023, with roughly 280,000 being absent due to reservists' responsibilities.
Another 345,000 workers were absent for various war-related reasons, either caring for children, family, or wounded civilians.
Those industries least affected by a shortage of workers include administration, healthcare, and financial services.
In response to the workforce shortages, Israeli-based companies have since frozen open positions, or have gone to downscale their recruitment efforts until conditions have improved.
One survey found roughly 26 percent of recruiters and hiring managers have said that they have frozen all open positions until further notice. Additionally, 35 percent have said that they are recruiting as normal, while only five percent claim that they are recruiting more.
Additionally, some tech companies are keeping positions open and available to those employees who have successfully made it through the hiring process but have since been called up as military reservists.
Companies have adopted new measures as part of their active, but slower recruiting process. Many have since gone on to introduce new methods that would allow the recruitment process to become more flexible and sensitive for candidates who are being interviewed for available positions.
More than this, automation software is now playing an important role in making the hiring and communication process easier, safer, and more convenient for candidates.
Demand for high-tech employees decreased sharply during the first quarter of 2023 according to the 2022-2023 Human Capital Report by the Israel Innovation Authority and SNPI Policy Institute.
However, globally, the tech sector has also been struggling to overcome the trend of technology and software layoffs. This year alone more than 40,000 American tech workers from over 165 companies have been laid off according to recent estimates.
This short-term outlook provides a seemingly gloomy outlook for the sector moving forward, however, despite consumers tightening their purse strings and advertisers pulling back their ad dollars, software and engineering remains among the fastest growing job sectors of trending jobs in the USA. On average, recruiters witnessed a positive increase in the IT job market, which grew by 8.2 percent throughout 2023. This is however true for rapidly advanced markets such as the U.S., which currently holds 30 percent of global software and IT career opportunities. Israel will likely experience the same once the war ends.
Other sectors such as hospitality, food and beverage, and tourism have noticed a decrease in activity over recent months as more than a third of employees have been absent since the start of the war. That is only natural in wartime and the Finance Ministry expects a rebound once the war is over.
Solutions And Opportunities On The Horizon
Despite the hardships, there have been some positive developments taking shape across the economy and labor force in recent months, as local companies and business leaders are optimistic that conditions will improve in the coming months.
Since the beginning of the year, the construction industry has started recruiting more foreign workers to fill jobs and positions previously occupied by Palestinian workers. More than 80,000 positions have remained unoccupied due to Palestinians being barred from entering Israel since the outbreak of conflict, due to security concerns.
In response, the construction industry has pushed to hire foreign workers, mostly from India to help plug the gap in the domestic workforce.
A positive turnaround in applicants witnessed thousands of young electricians, masons, plumbers, and carpenters attending a recruitment camp at Maharshi Dayanand University in Rohtak, India, according to a report by Reuters.
In return, Indian workers have been promised a monthly stipend of $1,600 by Israel’s Immigration and Border Authority (BIPA). For many construction workers, this seems to be the deal of a lifetime, as payment arrangements offered by BIPA are equivalent to almost a full year’s wages for many Indian construction workers. This arrangement could be a good solution to boost the Israeli economy, decrease security risks and sabotage (that sabotage going on for decades, with workers filling pipes with cement, etc.) from Palestinian Arab workers, and also boost ties with India.
In January, Israel’s Construction and Housing Ministry said that they would be increasing the quota of foreign construction workers from 50,000 to 70,000.
Elsewhere the Sri Lankan Ambassador to Israel, Nimal Bandara has since the outbreak of the war been working tirelessly with both the Israeli and Sri Lankan governments to find a solution to current labor shortages.
Bandara said since the conflict started, Sri Lankan residents working and living in Israel have remained in the country to help support the war effort through donating blood and volunteering on farms. Many of them have stayed behind, helping wherever possible.
Government Aid and Economic Support Continues
Several weeks after the invasion and attack by Hamas, the Finance Ministry outlined and approved a war compensation package in an attempt to assist businesses that have been affected by the uncertain circumstances.
Following approval by the cabinet, businesses are entitled to 22 percent compensation for their fixed expenses and 75 percent of their salary expenses. In total, the maximum grant for businesses with a sales turnover of NIS 300,000 to NIS 100 million is capped at NIS 600,000. Similarly, those with a turnover of NIS 100 million to NIS 300 million will increase to NIS 1.2 million.
The compensation outline would later include businesses impacted by war-related damages through the end of December last year. On January 15, 2024, the Tax Authority announced the opening of its online systems, allowing businesses to submit online claims for grants until the end of the 90 days.
With the war-time aid packages in place, business leaders are feeling positive that the government’s response to the situation has come at a crucial time as many business owners have been struggling to operate amid the uncertainty.
The economic support provided by the government would significantly help boost economic stimulus across the country, and especially in regions heavily impacted by the war.
Similarly, Israel’s real estate industry has started showing signs of recovery, as five leading residential real estate companies on the Tel Aviv Stock Exchange (TASE) have seen strong improvements since the start of the year. On average, stock performance has increased by 73 percent since the beginning of 2023, and is up by 20 percent since the start of this year.
Market optimism has remained strong despite the ongoing war. Analysts at TASE have reported residential real estate stock surpassing the Real Estate Index. Since the beginning of 2023, the Index has climbed by 8.8 percent and has already risen 0.48 percent this year.
Other major indices, such as the TA Real Estate 90 Index, and TA-125 Index have already been up about 6.6% and 4%, respectively, since the beginning of 2024.
In March, Yaniv Pagot, head of trading at TASE said in an interview that investors are beginning to regain their confidence in Israel’s economy, and have become less pessimistic about further escalation of conflict in the north and that the worst of the economic fallout caused by the war is now behind them.
These developments come perhaps at a critical time following Moody’s downgrade of Israel’s credit rating from A1 to A2 in February 2024. The downgrade follows the weeks of conflict between Israeli forces and Hamas in the south, and growing tension in the north which has increased the government's deficit and led to a decline in economic output.
Nonetheless, investors in Israel and abroad remain optimistic for the months ahead as conditions on the stock market gradually show signs of improving, and many regain their confidence in Israel’s economy despite the challenging conditions many are having to operate under. Indeed, it may come as a surprise that Ishares Msci Israel ETF (NASDAQ:EIS), an ETF which tracks Israeli publicly traded companies, is up over five percent this year.
An Optimistic Look Towards 2024
As the year unfolds, and war-related efforts are being put in place to help stimulate the country’s economy and support local businesses, many might soon begin to share a sense of optimism going forward as new opportunities present themselves to the people and businesses of Israel.
While Israel’s economy had experienced major headwinds throughout much of the last several months, experts believe that the worst economic fallout from the war is now behind them and that the economy could soon begin to see an improvement in output as workers return to work and new foreign policies allows companies to employees highly skilled foreign laborers.
With assistance from the government, many business leaders and company executives can now slowly begin to plan their long-term occupational and development strategies for the year ahead. Despite the highly volatile conditions and a shared sense of uncertainty, an optimistic outlook could soon help the country start picking itself up once again, and overcome the difficult conditions.
Jacob Wolinsky is the founder and CEO of ValueWalk - a well-known financial media service. Before launching ValueWalk, he was an equity analyst at a micro-cap-focused private equity firm and then moved to a small/mid-cap value-focused research shop and worked in business development for hedge funds. He lives with his family in Passaic, New Jersey