Behind the Headlines: Crisis Harms Israel’s Economy – and Some Warn It Could Get Worse

With images of violence in the West Bank and Gaza Strip flashing across television screens around the world, it did not take long for Israel’s tourism industry to start feeling the pinch.

Hotel occupancy has plummeted at lightning speed, Ben-Gurion Airport is deserted and taxi drivers and tour guides have lost a big chunk of their income as cancellations of planned trips have flowed in.

Despite the impact on tourism and other industries, especially those that rely on Palestinian laborers, the crisis is unlikely to harm economic growth in the Jewish state this year because there is often a lag between political instability and economic fallout.

Since the crisis broke out at the beginning of the fourth quarter of 2000, its impact on this year’s overall statistics will be limited.

But, say business experts, next year could be a different story.

“The tourism industry is always the first industry to be affected all year round from the geopolitical situation, and safety and security are the main pillars for the industry,” said Abraham Rosental, chairman of the Israel Hotel Association.

“We have been in crisis before, but this time it is different because nobody knows exactly how far it is going to go and when it will end.”

Before the crisis, Israel was on course for 3 million tourist arrivals, which Israel had promoted as part of the Christian millennial year.

It was expected to be a record year for the industry, which makes up about 3 percent of the Israeli economy.

Now, at least 10,000 of the hotel industry’s 35,000 employees are at risk of losing their jobs, as are many more workers in other tourism-related fields.

In the short term, Rosental’s only hope is that Jews around the world will choose to show solidarity with Israel by visiting.

“We hope we will see a movement of more Jews, which is why we are sending a big delegation to the G.A.,” he said, referring to the federation movement’s annual gathering, the General Assembly, scheduled to begin Friday in Chicago.

But even if large numbers of Jewish tourists suddenly order solidarity packages with Israel, it will not be able to prevent the crisis affecting other areas of the economy.

Other industries already hit hard include construction and agriculture.

Even though these sectors have increasingly relied on foreign labor during the past few years, Palestinians still made up a big part of the workforce.

Now, with the West Bank and Gaza Strip sealed, many kibbutzim and other agricultural settlements have no means of harvesting, and building contractors are often without enough manpower to complete projects.

All of this has happened just as the Israeli economy was finally pulling out of a four-year economic slowdown.

Gross domestic product, which measures all goods and services produced in an economy — and is the main indicator of overall economic health — has grown about 2 percent in each of the last 3 years. This year, just before the crisis broke out, Israel’s Central Bureau of Statistics estimated the economy would grow at a robust rate of 5.8 percent.

But late last month, when the government presented its budget and economic forecasts for 2001, it lowered its projections for economic growth next year from 5 percent to between 4 and 4.5 percent.

At the same time, in anticipation of massive layoffs in tourism and other industries, it raised unemployment forecasts from 8.1 percent to 8.4 percent.

Oded Tira, president of the Manufacturers Association, an umbrella group for the business sector, said reducing unemployment will become more difficult if the crisis begins to eat away at economic growth.

Some economic officials add that Israel should count its blessings. The economy is in better shape than ever before, with strong growth and low inflation of about 1 percent.

“This does not mean we will not be affected if the unrest continues,” said Avi Ben-Bassat, director general of Israel’s Finance Ministry. “But we are entering this period with a stronger economy than ever before, and that will enable us to endure more easily.”

On Monday, the Tel Aviv Stock Exchange inched higher for a fourth straight session, a period in which the index of the top 100 stocks climbed a total of 8 percent to 498.8.

But the index was still 10 percent lower than the day the clashes started on Sept. 28 and traders say that for the first time in years, regional instability has become a key factor in the stock market.

According to conventional wisdom in the business sector, Israel’s high-tech industry, which has been the engine for economic growth in recent years, will have a greater ability to withstand political volatility.

The biggest sign of this came on the October day that President Clinton announced a truce in the Egyptian resort of Sharm el-Sheik.

The same day, Marvell Technology, a communications equipment company from California, announced that it would acquire Galileo Technology of Israel for $2.7 billion in a stock deal.

However, there are already signs of weakness in the industry, which has always been considered immune to the political ups and downs of the region and more affected by sentiments on the U.S. Nasdaq exchange.

Expected business visitors are canceling trips to Israel en masse, making it difficult to conduct normal business, and some players quietly say that despite the Marvell acquisition and other recent investments, potential foreign investors will not be able to remain indifferent for long.

“We are already starting to feel the impact,” said one Israeli venture capitalist, speaking on condition of anonymity. “It may become much more difficult to attract foreign investors.”

Despite all of these question marks hovering over the economy, financial analysts have been cautious before making big revisions to their economic forecasts.

Many say they are waiting to get a sense of whether Israel and the Palestinians will find some way of pulling back from the brink and stopping the violence before the economic impact hits too hard.

But already, they can assess the potential impact of a drawn-out conflict.

For example, said Jonathan Katz, chief economist at Nessuah Zannex Securities, a Tel Aviv brokerage firm, an open-ended conflict will put a damper on overall consumer spending, which accounts for about 65 percent of the GDP.

“This is much more significant than high-tech,” he said. “If there is gloom and pessimism, people will certainly shop less and go less to malls and restaurants. They will also be more wary of taking on increased debt or mortgages when their future permanent income is uncertain and it’s hard to see the light at the end of the tunnel.”

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