Israel's economy is struggling. Economists say ending the war would help

JERUSALEM (AP) — In Jerusalem’s Old City, nearly all souvenir shops are closed. In Haifa’s flea market, forlorn merchants polish their wares on empty streets. Airlines are canceling flights, businesses are failing and luxury hotels are half empty.

Nearly 11 months into the war with Hamas, Israel’s economy is struggling as the country's leaders grind ahead with an offensive in Gaza that shows no signs of ending and threatens to escalate into a wider conflict.

Prime Minister Benjamin Netanyahu has tried to allay concerns by saying the economic damage is only temporary. But the bloodiest, most destructive war ever between Israel and Hamas has hurt thousands of small businesses and compromised international trust in an economy once thought of as an entrepreneurial dynamo. Some leading economists say a cease-fire is the best way to stop the damage.

“The economy right now is under huge uncertainty, and it’s related to the security situation — how long the war will go on, what the intensity will be and the question of whether there will be further escalation,” said Karnit Flug, Israel’s former central bank chief who is now the vice president of research at the Israel Democracy Institute, a Jerusalem think tank.

The war has inflicted a far heavier toll on Gaza’s already broken economy, displacing 90% of the population and leaving the vast majority of the workforce unemployed. All banks in the territory have shut. The fighting has killed more than 40,000 people, according to Palestinian health officials in the Hamas-run territory. Their count does not distinguish between civilians and combatants.

The fighting in Gaza and daily attacks from Hezbollah militants in Lebanon have also driven tens of thousands of people from their homes along Israel's northern and southern borders and caused large-scale damage.

The Israeli economy has recovered from previous shocks, including shorter wars with Hamas. But this longer conflict has created a bigger strain, including the cost of rebuilding, compensating families of victims and reserve soldiers, and vast military spending.

The drawn-out nature of the fighting and the threat of further escalation with Iran and its Lebanese proxy, Hezbollah, have an especially harsh impact on tourism. Though tourism is not a major driver of the economy, the damage has hurt thousands of workers and small businesses.

“The hardest thing is that we don’t know when the war will end,” said Israeli tour guide Daniel Jacob, whose family is living off savings. “We need to finish the war before this year’s end. If it’s another half a year, I don’t know how long we’re going to make it.”

Jacob, 45, returned in April from six months of duty as a reserve soldier to find out that business had dried up. He was forced to shutter the tourism company he spent two decades developing. His only income is aid from the government, which pays him half his prewar salary every few months.

Meir Sabag, a Haifa antiques dealer whose shop sat empty, said business is worse now than during the COVID-19 pandemic.

On a recent weekday, the formerly bustling port of Haifa, a major hub of Israeli import-export where massive container ships would often stop, was still.

With Yemen’s Houthi rebel group endangering ships passing through Egypt’s Suez Canal, many long-haul ships have stopped using Israeli ports as hubs, said a port official who spoke on the condition of anonymity because he was sharing internal information.

He said Israeli ports saw a 16% percent drop in shipping in the first half of the year, compared with the same period in 2023.

The war began on Oct. 7, when Hamas militants killed some 1,200 people and took 250 people hostage.

Renewed U.S.-led cease-fire efforts appear to be sputtering, and Iran and Hezbollah have threatened to avenge the recent assassinations of top militant leaders, raising the threat of a wider regional war. These fears have prompted major airlines, including Delta, United and Lufthansa, to suspend flights in and out of Israel.

Yacov Sheinin, an Israeli economist with decades of experience advising Israeli premiers and government ministries, said the total cost of the war could amount to $120 billion, or 20% of the country’s gross domestic product, a broad measure of economic activity.

Of all 38 member countries in the Organization for Economic Cooperation and Development, Israel’s economy underwent the biggest slowdown from April to June, the organization reported Thursday. The Israeli GDP was projected to grow 3% in 2024. The Bank of Israel now predicts a growth rate of 1.5% — and that's if the war ends this year.

Fitch downgraded Israel’s rating from A-plus to A earlier this month, following similar downgrades by S&P and Moody’s. The downgrading could raise the government's borrowing costs.

“In our view, the conflict in Gaza could last well into 2025,” Fitch warned in its rating note, which cited the possibility of "significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.”

In another worrying sign, the Finance Ministry this month said the country’s deficit over the last 12 months has risen to over 8% of GDP, far exceeding the 6.6% deficit-to-GDP ratio the ministry projected for 2024. In 2023, Israel ’s budget deficit was roughly 4% of its GDP.

The downgrade and the deficit have increased pressure on the Israeli government to end the war and reduce the deficit — something that would require unpopular decisions such as raising taxes or cutting spending.

But Netanyahu needs to keep his coalition afloat, and his hard-line finance minister, Bezalel Smotrich, wants the war to continue until Hamas is decimated.

Flug, the former central bank chief, said the situation is unsustainable and that the coalition will have to cut back on spending, such as unpopular subsidies to ultra-Orthodox schools that are perceived by the broader public as wasteful.

“The public will have hard time accepting it if the government does not show that the severity of the situation forces them to give up some of the things that are dear to them,” Flug said.

Smotrich said Israel’s economy "is strong” and vowed to pass a “responsible budget that will continue to support all the needs of the war, while maintaining fiscal frameworks and promoting growth engines.”

The unemployment rate has dipped below pre-war levels, Sheinin said, to 3.4% in July compared with 3.6% in July of last year. But when taking into account Israelis forced out of the labor market, the figure rises to 4.8%, a figure that would still be considered low in most countries.

Meanwhile, many small businesses have closed because their owners and employees were called up for reserve military duty. Others are struggling amid the broader slowdown.

Israeli business information company CofaceBDI reports that some 46,000 businesses have closed since the start of the war — 75% of them small businesses.

Even Jerusalem’s iconic American Colony hotel, a popular stop for politicians, diplomats and movie stars, has laid off workers and is mulling pay cuts, said Jeremy Berkovitz, who represents the owners.

“We did consider at one point closing for a few months,” said Berkovitz “but of course that would mean sacking all the staff. It would have meant letting the gardens, which we’ve developed over 120 years, go fallow.”

Sheinin said the best way to help the economy bounce back would be to end the war.

“But,” he cautioned. “If we are stubborn and continue this war, we will not recover.”

This story corrects the name of the economist to Yacov Sheinin instead of Jacob Sheinin.

Find more AP coverage at https://apnews.com/hub/israel-hamas-war

In this photo with a long exposure, traffic moves slowly in Tel Aviv, Israel, Wednesday, Aug. 14, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Ariel Schalit)

A worker readies a guest room at the American Colony Hotel in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Jeremy Berkovitz, the official representative of the owners. (AP Photo/Mahmoud Illean)

Guests swim and sunbathe at the pool at the American Colony Hotel in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Jeremy Berkovitz, the official representative of the owners. (AP Photo/Mahmoud Illean)

A person walks his dog past a closed shop to rent in Tel Aviv, Israel, Thursday, Aug. 15, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Ariel Schalit)

A woman walks past a closed shop in Haifa, Israel, Thursday, Aug. 15, 2024. (AP Photo/Leo Correa)

In this photo taken with a long exposure, traffic moves slowly in Tel Aviv, Israel, Wednesday, Aug. 14, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Ariel Schalit)

Cars sit at the port of Haifa, Israel, Thursday, Aug. 15, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Leo Correa)

A worker walks through the garden courtyard where breakfast is served American Colony Hotel in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Jeremy Berkovitz, the official representative of the owners. (AP Photo/Mahmoud Illean)

A woman checks the pomegranates displayed at a street market in Haifa, Israel, Friday, Aug. 16, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Leo Correa)

Jeremy Berkovitz, right, the official representative of the owners of the American Colony Hotel, poses for a portrait in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Berkovitz. (AP Photo/Mahmoud Illean)

Gantry cranes used to load and unload cargo containers from ships sit stand during the dawn, in the port of Haifa, Israel, Thursday, Aug. 15, 2024. (AP Photo/Leo Correa)

A dining room at the American Colony Hotel in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Jeremy Berkovitz, the official representative of the owners. (AP Photo/Mahmoud Illean)

A worker walks in a corridor at the American Colony Hotel in east Jerusalem, Sunday, Aug. 18, 2024. As Israel’s economy is suffering from the nearly 11-month war with Hamas, Jerusalem’s iconic American Colony hotel has had to lay off workers and are mulling pay cuts, said Jeremy Berkovitz, the official representative of the owners. (AP Photo/Mahmoud Illean)

A person sits on the sidewalk next to a mall in Tel Aviv, Israel, Thursday, Aug. 15, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Ariel Schalit)

A woman looks at her phone while eating a sandwich next to a shopping cart in Haifa, Israel, Thursday, Aug. 15, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Leo Correa)

People buy fruit from a street market in Haifa, Israel, Friday, Aug. 16, 2024. Israel's economy is suffering from the nearly 11-month war with Hamas, as its leaders grind ahead with its offensive in Gaza that threatens to escalate into a wider conflict. (AP Photo/Leo Correa)

WASHINGTON (AP) — Ukraine’s push to ease restrictions on the use of weapons from the United States and Britain will be discussed Friday in White House talks between President Joe Biden and Prime Minister Keir Starmer.

Ukraine wants approval to use some weapons to strike deeper into Russia and there are signs Biden might shift U.S. policy in response. Russian President Vladimir Putin warned that Ukraine’s use of long-range weapons would put NATO at war with Moscow.

While the issue is expected to be at the top of the agenda for the meeting, it appeared unlikely that Biden and Starmer would announce any policy changes at this time, according to two U.S. officials familiar with planning for the talks. The officials spoke on condition of anonymity because they were not authorized to discuss the private deliberations.

During this week’s visit to Kyiv by Secretary of State Antony Blinken and British Foreign Secretary David Lammy, Ukrainian officials renewed their pleas to use Western-provided long-range missiles against targets deeper inside Russia.

Blinken said he had “no doubt” that Biden and Starmer would discuss the matter, noting the U.S. has adapted and “will adjust as necessary” as Russia’s battlefield strategy has changed.

Blinken spoke similarly in May, shortly before the U.S. allowed Ukraine to use American-provided weapons just inside Russian territory. The permitted distance has been largely limited to cross-border targets deemed a direct threat, out of concerns about further escalating the conflict.

Biden also has hinted that a change could be afoot. In an exchange with reporters this week about whether he was ready to ease weapons restrictions on Ukraine, he responded, “We’re working that out now.”

Putin said Thursday that allowing long-range strikes “would mean that NATO countries, the United States, and European countries are at war with Russia. … If this is so, then, bearing in mind the change in the very essence of this conflict, we will make appropriate decisions based on the threats that will be created for us.”

His remarks were in line with the narrative the Kremlin has promoted since early in the Ukraine war, accusing NATO countries of de-facto participation in the conflict and threatening a response.

Earlier in the year, Putin warned that Russia could provide long-range weapons to others to strike Western targets in response to NATO allies allowing Ukraine to use their arms to attack Russian territory, saying it “would mark their direct involvement in the war against the Russian Federation, and we reserve the right to act the same way.”

Starmer, in response to Putin's comments Thursday, said on his way to the U.S. that Britain does not seek any conflict with Russia.

“Russia started this conflict," Starmer said. “Russia illegally invaded Ukraine. Russia could end this conflict straight away.”

He added: “Ukraine has the right to self-defense and we’ve obviously been absolutely fully supportive of Ukraine’s right to self-defense — we’re providing training capability, as you know."

“But we don’t seek any conflict with Russia — that’s not our intention in the slightest," Starmer said.

Ukraine's president, Volodymyr Zelenskyy, has pressed U.S. and allied military leaders to go much further. He argues that the U.S. must allow Ukraine to target Russian air bases and launch sites far from the border as Russia has stepped up assaults on Ukraine’s electricity grid and utilities before the winter.

Zelenskyy also wants more long-range weaponry from Washington, including the Army Tactical Missile System, known as ATACMS, for strikes in Russia.

ATACMS would not be the answer to the main threat Ukraine faces from long-range Russian glide bombs, which are being fired from more than 300 kilometers (185 miles) away, beyond the ATACMS' reach, said Lt. Col. Charlie Dietz, Pentagon spokesperson.

American officials also do not believe they have enough of the weapon systems available to provide Ukraine with the number to make a substantive difference to conditions on the ground, one of the U.S. officials said.

During a meeting of allied defense ministers last week, Defense Secretary Lloyd Austin said he did not believe providing Ukraine with long-range weapon systems would be a game-changer. He noted that Ukraine has already been able to strike inside Russia with its own internally produced systems, including drones.

“I don’t believe one capability is going to be decisive, and I stand by that comment,” Austin said.

“As of right now, the policy has not changed," Maj. Gen. Pat Ryder, Pentagon press secretary, said Thursday.

Starmer said he was visiting Washington for “strategic meetings to discuss Ukraine and to discuss the Middle East.” It’s the prime minister’s second meeting with Biden since his center-left government was elected in July.

It comes after Britain last week diverged from the U.S. by suspending some arms exports to Israel because of the risk they could be used to break international law.

Their meeting also comes before this month’s annual meeting of global leaders at the U.N. General Assembly. The White House talks were scheduled in part to help Biden and Starmer compare notes on the war in Ukraine, the languishing efforts to get a cease-fire deal in Gaza, mutual concerns in the Indo-Pacific, and other issues before the U.N. meeting.

The White House also has tried in recent days to put a greater emphasis on the nexus between the war in Ukraine and the conflict in the Middle East that was sparked after Iranian-backed Hamas militants in Gaza launched attacks on Israel on Oct. 7.

The Biden administration said this week that Iran recently delivered short-range ballistic weapons to Russia to use against Ukraine, a transfer that White House officials worry will allow Russia to use more of its arsenal for targets far beyond the Ukrainian front line while employing Iranian warheads for closer-range targets.

In turn, the U.S. administration says Russia has been tightening its relationship with Iran, including by providing it with nuclear and space technology.

“This is obviously deeply concerning,” White House national security spokesperson John Kirby said of the missile transfer. “And it certainly speaks to the manner in which this partnership threatens European security and how it illustrates Iran’s destabilizing influence now reaches well beyond the Middle East.”

Associated Press writers Jill Lawless in London, Dasha Litvinova in Tallinn, Estonia and Tara Copp, and Diplomatic Writer Matthew Lee in Warsaw, Poland, contributed to this report.

President Joe Biden speaks during the Violence Against Women Act 30th anniversary celebration on the South Lawn of the White House, Thursday, Sept. 12, 2024, in Washington. (AP Photo/Manuel Balce Ceneta)

Britain's Prime Minister Keir Starmer, center, talks to the media on board his plane as he flies to Washington DC., Thursday Sept. 12, 2024. (Stefan Rousseau/Pool via AP)