Clouds gather over Israeli economy:  Gaza war blows black hole in country’s finances

The terrace at the House of Lords was packed when Lord Austin of Dudley hosted a reception for Israeli energy-tech innovators last week.

Among those present, as coffee and pastries were passed around, were representatives of the London Stock Exchange seeking initial public offering (IPO) opportunities, Shell UK’s top climate transition guru and Britain’s ambassador to Israel Simon Walters making his first trip home to the UK since the atrocities of October 7.

The atmosphere was suitably upbeat and speeches from Austin and Walters conveyed the impression that nothing had changed since Israel’s Prime Minister Benjamin Netanyahu embarked on his all-out war on Hamas.

Austin noted that Britain remained Israel’s third largest trading partner, and in spite of the Gaza conflict trade between the two nations was now worth £7billion a year.

Among other things one in five medicines prescribed by the NHS, saving countless British lives, are from Israel.

Danger signs: A gloomy Tel Aviv skyline. The war in Gaza and a perverse reaction to events, fuelled by social media, has tarnished Israel’s reputation and standing in the world

Walters was equally effusive. He expressed solidarity with friends in Israel and noted that it was ‘vital that life goes on’, including co-operation between the countries on research and innovation.

It was a surprisingly upbeat message given the increasing exasperation of his boss Lord Cameron over humanitarian assistance to Gaza’s struggling population and relentless broadcast media assault on the behaviour of the Israel Defence Forces (IDF).

As intriguing as the green solutions offered by Israel’s Climate First initiative are, such as drone tech which can monitor the performance of 300 wind farm towers a day (against the current six), it was hard to think much of this was likely to be adopted any time soon.

Gaza and a perverse reaction to events, fuelled by Tik Tok and other social media, has tarnished Israel’s reputation and standing in the world.

Just how damaging the relentless anti-Israel rhetoric is to the country was demonstrated in recent days when BP and the Abu Dhabi National Oil Company suspended talks with Tel Aviv on a £1.6billion energy project.

The overseas investors had planned to take a 50 per cent stake in Tel Aviv listed NewMed Energy, which has interests in the vast natural gas fields off Israel’s Mediterranean coastline.

The would-be investors pulled back, citing ‘uncertainty created by the external environment’. It is thought to be the biggest corporate deal to have been disrupted since the start of the Gaza war, which has cost an estimated 31,000 lives.

The suspension of the deal is particularly sensitive because it is among the first signs of a breach in the Abraham Accords of 2020 marking a new era of economic, commercial and political co-operation with Gulf states.

The close ties, which turned Dubai into a top tourist spot for Israelis, has been a cause of consternation on the arc of radicalism, bankrolled by Iran, which runs through the region.

Many analysts believe that Iran financed and encouraged the Hamas assault of October 7 in an effort to prevent the Abraham Accords being extended to Saudi Arabia, a move which would have frozen out opportunities for Palestinian advancement.

Instead, Israel’s retaliation – which some argue was a trap laid by Hamas – has incited radical elements across the region. 

The most damaging impact has been on shipping through the Red Sea. Remarkably, so far, the expected surge in energy prices has not occurred. 

Nevertheless, the Houthi attacks are impacting Western economies. Britain’s economic recovery in January, when output rose by 0.2 per cent, would have been far stronger if manufacturing supply chains had been unimpeded.

Israel’s own booming, high tech-driven economy is being devastated by the war.

Even before the conflagration, the danger signs were there as some of the tech giants, which dominated the skyline of Tel Aviv and Haifa, pulled back from new investment amid protests against the Netanyahu-led government’s anti-democratic judicial call up reforms.

In the final quarter of 2023, the country’s output plunged by 19.4 per cent. The reversal was triggered by the call up of some 300,000 reservists for military duty.

At the same time, large swathe of Israelis, some 120,000, have been moved from vulnerable neighbourhoods along Israel’s northern borders with Lebanon and Syria.

Many are being housed, at government expense, in tourist hotels in the South.

The country’s solid public finances have been decimated. It was recently announced that the country is to raise £47billion in debt and taxes to finance the hole in the national budget.

To put the figure in context, it is almost the same amount of money which a UK government would need to fully abolish national insurance.

There have been some shards of light from afar even as the war has progressed.

The hedge fund financier Bill Ackman, in an act of solidarity, bought a 25 per cent stake in the Tel Aviv Stock Exchange.

The government in Jerusalem dug deep to offer tech giant Intel a £2.5billion subsidy to build a £20billion semi-conductor plant in Israel taking advantage of the country’s highly tech-skilled workforce.

So far the deal looks secure. But the sheer brutality of the conflict, as the BP decision shows, is changing the geo-political dynamics of being too close to Israel.

Efforts to create a more positive narrative, seen at the Climate First event in the Lords, is admirable.

But there are severe doubts as to how long it will take to turn the tide of opprobrium.

This post first appeared on Dailymail.co.uk