How the war with Hamas has damaged Israel’s tech companies and economy

At 6:45 a.m. on October 7, Jack “Tato” Bigio, the founder of the technology company UBQ Materials, spoke to his chief operating officer, who said there were terrorists on his kibbutz. Other employees texted that they were hiding in safe rooms, and one said her husband had been shot in the stomach.

“It was like doomsday,” Mr. Bigio said.

Hamas’ attack on Israel forced UBQ Materials to close its factory, located 30 kilometers from the Gaza border, leaving staff in shock. Two employees were murdered. Many lost their homes and were moved 100 miles away.

Founded in 2012, UBQ Materials uses technology that converts household waste into a plastic substitute used to make tables and chairs, McDonald’s trays and car parts for Mercedes-Benz. The company was able to launch within three weeks, but many others are facing ongoing problems with operations and financing.

About 23,000 Palestinians have been killed by Israel since October 7, according to Gaza’s Health Ministry, which does not distinguish between the deaths of civilians and the deaths of fighters. About a million evacuees from the north of the region have fled south. The strip has suffered widespread destruction, with hunger, disruption of water, electricity and communications networks and limited medical care, as many hospitals have been damaged.

In Israel, Hamas attacks on October 7 killed 1,200 people and took hundreds hostage, including more than 100 who Israeli authorities say are still being held in Gaza. The war has turned life upside down: hundreds of thousands of reserve soldiers have been called up and 200,000 people have been displaced from the border areas in the north and south.

In ways that are often less visible outside the country, the war has also damaged Israel’s economy. Tourism has virtually come to a standstill and government spending has soared. The blow to tech companies has shaken confidence in a sector that has become a key driver of Israel’s economy.

The call-up of 350,000 Army reservists disrupted operations at many companies. Many customer orders were suspended or canceled completely, and investors got cold feet. according to a study by the Israel Innovation Authority, a government-funded agency, and the Start-Up Nation Policy Institute.

Israel’s technology sector has grown rapidly over the past decade and is responsible for almost half of all exports and a fifth of economic output. Israeli Innovation Authority said.

As a result, The Organization for Economic Co-operation and Development said thisthe war will cause a “temporary but pronounced slowdown” in the Israeli economy. Before the October 7 attacks, growth had already been growing at about 3 percent and is expected to slow to 1.5 percent this year. The economy is burdened by labor shortages, lower consumer and business confidence and higher inflation.

Another concern is foreign investment, which was already weak before Oct. 7 because of the uncertainty caused by the dispute between Prime Minister Benjamin Netanyahu’s right-wing government and Israel’s Supreme Court, said Jonathan Katz, a former economic forecaster at Israel’s Finance Ministry.

“The question now is whether foreigners still want to invest in Israeli high-tech, or whether they would rather invest their money in a place that is safe and quiet, like Ireland,” Mr. Katz said.

To stimulate the stagnant economy, the Bank of Israel last week lowered interest rates by a quarter of a percentage point to 4.5 percent. It was the first rate cut since the start of the Covid pandemic, and central bank governor Amir Yaron said more cuts were expected.

Mr Yaron has said the economy was already adjusting to war conditions and showing signs of recovery, but the consequences of the prolonged hostilities would be significant.

In particular, he stressed the importance of stability and the need to rein in rising government spending, which the central bank expects will contribute to more government debt and higher deficits.

“It is clear to all of us that the current economic uncertainty is very closely linked to the security situation and how the war will develop,” Mr Yaron said.

Israel has taken several steps to curb uncertainty, including stabilizing the Israeli shekel. The government plans to increase the number of foreign workers allowed into the country from 50,000 to 70,000 to address the sudden labor shortage. Workers from abroad have fled and more than 100,000 Palestinians in the West Bank are banned from working in Israel.

In recent weeks, the military has also begun withdrawing several thousand troops from the Gaza Strip, at least temporarily, in part because of the economic toll of such a massive deployment of reservists.

Yet on Jan. 1, Mr. Yaron issued a stern warning to Mr. Netanyahu about budget priorities at a time when more spending must be directed toward defense and security and pressing domestic needs, such as making communities near the Gaza and Lebanese borders habitable. they were attacked by Hamas and Hezbollah militants. Criticism of the Netanyahu government’s financing of West Bank settlements and of the ultra-Orthodox has increased since the war.

“If we do not act now to adjust the budget through cuts, removing redundant ministries and increasing revenues to meet the needs of the war, it will likely cost the economy much more in the future.” , said Mr Yaron.

The war in Gaza, one of the longest Israel has ever waged, is already reverberating throughout the economy.

Construction, which represents 14 percent of Israel’s economy, has slowed due to labor shortages. Although volunteers do their part, the departure of foreign workers and the loss of Palestinian labor have left fruits and vegetables rotting on trees and in fields.

In addition, there is a shortage of imports because attacks by Houthi rebels in Yemen have disrupted transport through the Bab el-Mandeb Strait.

Tourism took an immediate nosedive on October 8, just as it was rebounding from the Covid pandemic, government officials said.

“There is nothing – no Israeli tourists, no non-Israeli tourists, no weddings, no pre-wedding henna parties, no house warmings. Nobody is celebrating,” said Tomer Bent, who runs King David Treasures, a Judaica shop on Jerusalem’s popular Ben Yehuda Street, usually teeming with people eating pizza and falafel or drinking coffee at sidewalk restaurants.

“But it will get better,” said Mr. Bent, pointing to heaven: “We believe in Him.”

Shops on Ben Yehuda stayed open until midnight in late December, when American tourists visited during the winter break and Christmas holidays, said Moshe Saudi, who staffed a souvenir shop. Now they close earlier.

The Israel Innovation Authority has $100 million in public money to support technology companies, especially startups that have lost their funding. The sector was encouraged by last month’s announcement that semiconductor giant Intel would go ahead with a planned $25 billion investment to expand a chip factory in southern Israel, after receiving a $3.2 billion subsidy received from the government.

“All our entrepreneurs understand that no matter how much our customers abroad support us and sympathize with us, if we cannot meet our commitments, they will have to move on,” said Dror Bin, chief executive of the Innovation Authority.

Shortly after the war broke out, the organization started a new promotional campaign to increase trust in Israeli technology companies despite the war. The slogan: “Israeli technology delivers results. DOES NOT MATTER WHAT.”