Israeli reservists on their tanks at a IDF staging area near the border of Gaza in southern Israel on May 21, 2024. (Heidi Levine for The Washington Post)
TEL AVIV, Israel — Shelly Lotan’s food-tech startup in northern Israel was just a year old when Hezbollah started firing missiles across the border last October and the government advised everyone in the area to evacuate.
Two of her five employees were called up to serve in the military. Those that remained moved the company’s office to one of her employee’s parents’ basement. Investments slowed to a trickle.
As Israel nears the anniversary of the Hamas-led assault, with no Gaza cease-fire in sight and a possible invasion of Lebanon looming, Lotan’s business is barely hanging on. And her frustration with the government — for its handling of the war, and the downstream effects on the economy — is mounting.
The human cost of Oct. 7 on this small country has been immense. Nearly everyone knew someone who was killed, injured or kidnapped that day, or deployed to the front lines in the months that followed. Often lost in the turmoil and tragedy of the past year is the toll of the conflict on the Israeli economy.
The country has seen its credit score downgraded and its gross domestic product shrink sharply. Tens of thousands of businesses have closed, and a growing number of jobs are being moved offshore. Israeli reservists have put careers on hold — or struggled to juggle them with military service.
While Israel’s massive high-tech industry has remained resilient, construction and agriculture — which relied heavily on Palestinians whose work permits were canceled by Israel after Oct. 7 — have been hit hard. Tourism has plunged by more than 75%, the Central Bureau of Statistics said in June, leaving many shop fronts shuttered in the usually bustling thoroughfares of Jerusalem’s Old City.
Defense spending, meanwhile, has at least doubled, with the Central Bank warning that the war could cost $67 billion through 2025 — a prediction made before Israel’s recent escalation in Lebanon and the mobilization of two reserve brigades to the northern front on Wednesday.
“The economy is in serious danger unless the government wakes up,” said Dan Ben-David, who heads the Shoresh Institution for Socioeconomic Research. “Right now they are completely disconnected from anything that is not war … and there is no end in sight.”
‘The mother of all wars’
Lotan, who balanced running her business with raising three kids while her husband served for five months in the military, said she has struggled to raise money from venture capital firms wary of investing in Israel because of the risk. She is still dealing with expenses related to the transfer of equipment from her old headquarters in Kiryat Shmona, just a few miles from the border with Lebanon. And the cost of living keeps increasing.
When she and a friend, a fellow startup founder, got coffee the other day in Tel Aviv, Lotan said, they agreed that “the most responsible thing to do is to start planning a way out.”
“It feels like if a significant change doesn’t happen soon, the economy will crash, she said.
International customers began voicing concerns about Israel in the months before Oct. 7, business owners said, when Prime Minister Benjamin Netanyahu tried to weaken the Supreme Court, leading to mass protests and concerns about the strength of Israel’s democracy.
Sagi Eliyahu, the chief executive of software company KMS lighthouse, said that on Oct. 7, customers expressed sympathy. “The day after,” he said, “they started asking about procedures and backup plans. And those were fair questions.”
Part of his 200-person company’s response has been to accelerate hiring outside the country, Eliyahu said, adding 30 employees over the past year in Portugal and Serbia. Among his 80 Israel-based employees, one was so upset by the government’s handling of the war that they emigrated to Canada, and two others are thinking about leaving.
Israel’s economy is generally resilient in the face of conflict, said Dany Bahar, a senior fellow at the Center for Global Development. He said Israel’s outsize contributions to innovation and technology have created a massive startup culture, making the country a destination for international research and development.
“But this war seems like the mother of all wars,” he added. “That means it is expensive … and the money has to come from somewhere.”
Part of the challenge, he said, is that the government has been unwilling to make cuts to coalition funds, used to fund social programs, including religious studies for Israel’s ultra-Orthodox community. The subsidies are widely unpopular among secular Israelis, but ultra-Orthodox parties are a key pillar of Netanyahu’s ruling coalition.
Ben-David, the economist, said professionals in the finance ministry, now led by far-right settler activist Bezalel Smotrich, are frustrated with a government they feel is more focused on appeasing its supporters than shoring up the economy. He said he has pleaded with them to stay in their roles.
“They are the last public dam we have,” he said. “The politicians are in la la land.”
‘We can’t go backwards’
About 287,000 Israelis were called up to serve after Oct. 7, a massive number in a country of less than 10 million. Many were integral to their companies, and have struggled to balance career goals with front line duties.
Idan Ben-David, a 28 year-old who reported at 8 a.m. on Oct. 7, still spends four nights a week serving with Israel’s Air Force; during the day, he runs Tauga AI, a startup focused on using artificial intelligence to personalize learning.
The 10-person company has been able to stay afloat, said Ben-David, who has become accustomed to skipping nights of sleep. But it has not grown in the way he had planned.
The economy “should be one of the things that leads Israel to want the war to finish sooner rather than later,” he said.
Fay Goldstein, an American-Israeli who served as a spokeswoman for the Israel Defense Forces after Oct. 7, recalled driving to the kibbutzim that were attacked by Hamas while messaging her team on Slack about their startup, which uses AI to boost manufacturing sales.
She would try to make it back to Tel Aviv by 10 p.m., she said, so she could take business calls before the end of the U.S. work day. She took a meeting in November with the person who turned out to be her first angel investor — in her IDF uniform, in an army car — as she waited for news about a potential hostage release deal in Gaza.
All around her, she said, fellow reservists were doing the same — taking Zoom meetings with colleagues or studying for degrees. When she was released from service after four months, she doubled down on building her company.
“We can’t go backwards,” she said. A lot of Israel’s future relies on its economic prowess.”
‘The tourists are gone’
In calmer times, Ayman Shawar’s family bakery in Jerusalem’s Old City was full of tourists. On Saturdays, there would be lines out the door and shelves filled with pastries. But since Oct. 7, there has been only a trickle of customers, said Shawar, a Palestinian citizen of Israel who said his family has run the bakery for centuries.
“It feels like nighttime, and we don’t know when morning will come,” he said, sitting in an empty shop with empty shelves.
The only person who’d come by was Abdul Qader Alami, 70, who runs an ice cream and juice stand across the street. Alami said it had been months since he sold anything.
He spends his days chatting with fellow Palestinian business owners — many of whom have shuttered their stalls entirely — and trying not to think too much about the future. Without a retirement check from decades of work as a wastewater operator in the United States, he said, “I’d starve.”
“The economy was tourists and the tourists are gone,” he said. “There is no economy.”
