Israel's tech jewel can help it emerge from the fog of war

Daily Mail​

7 days ago

The glistening towers of the Tel Aviv skyline, an inviting target for Iran's incoming ballistic missiles, symbolise Israel's status as one of the world's most popular destinations for investment in pioneering technology.
But the prolonged campaign in Gaza, boycotts and a nervy Silicon Valley have squeezed funding and come at a heavy price. Advanced warfare is costly and the conflict with Iran is a blow to Israel's science and digital sectors.
Despite this, the country's currency, the shekel, has risen and shares on the Tel Aviv stock exchange have gone up in value in recent days. Global investors are betting that when the bombardment of Iran is complete Israel will be a safer place and demand for the advanced technology behind the cyber weapons deployed against Iran will roar back.
The current conflict is also not, so far, proving to be a repetition of the 1973 Yom Kippur War, when Israel was attacked by a coalition of Arab states led by Egypt and Syria. An oil embargo enforced by the Gulf states during the conflict sent energy prices rocketing and sparked both inflation and recession among the world's richest democracies.
Israel's enfeebled economy took decades to recover, but this century growth has rocketed. Economic output is now 50 times higher, and public finances have stabilised, creating more budget headroom for long military engagements.
There has been much discussion as to whether the mullahs in Tehran might now seek to block the Strait of Hormuz, a narrow passageway through which Gulf oil and liquefied natural gas supplies must pass for export.
Since Israel launched its assault on Iran last week oil prices have climbed, and investors have sought safe havens such as gold.
But the energy picture is now different from what it was during previous Middle East conflicts. Oil shipments from the Gulf still represent 20 per cent of global supply, but the US, the world's second-biggest consumer of energy after China, is now self-sufficient in oil and gas. As a result, its energy supply is less at risk if rulers in the Middle East turn off the taps.
That is not to underestimate the threat, especially to Israel's economy. Fighting wars, particularly those using high-tech weaponry, is hugely costly. Re'em Aminach, a former financial adviser to the chief of staff of the Israel Defense Forces (IDF), puts the bill for offensive and defensive operations against Iran at £550,000 a day.
That is not where the fiscal and economic damage stops. The costs of mobilising troops, calling up reservists, a disrupted labour market and reconstruction from rocket damage, are mounting. The ongoing cost of the Gaza campaign is £40 billion. With lost investment and growth, it could reach £300 billion over a decade.
Israel's debt now stands at 67.9 per cent of the country's economic output, up from 61.5 per cent at the end of 2023. In comparison with most Western democracies, this is modest. In Britain it is close to 100 per cent. Israel's 2025 budget set a limit for borrowing at 4.9 per cent of national output. But the costs of the Iran war will blow this out of the water so Israeli citizens and firms can now expect tax increases and further budget cuts. Israel already spends a huge 8.8 per cent of its output on defence.
The country's soaring borrowing and debt is less of a problem than in much of the West because of its growth prospects. Despite the long period of mobilisation, Israel's finance ministry predicted growth this year of 3.6 per cent – before the assault on Iran was unleashed. But Israel's war has hurt cashflow into its vibrant tech sector on many fronts. Earlier this decade, new investment reached a peak of £4.5 billion and Israel was seen by venture capitalists as the second-best place to back new tech after Silicon Valley. But last year this figure had plunged to £900 million as investors were put off by the situation in Gaza.
What is clear is that a revival will take time, especially when so many young engineers, cyber experts and scientists are in IDF uniform. The country's longest war is proving tough for Israel's economy and citizens.
But there is confidence among key investors that the darkest hour is just before dawn.