6.45pm

Lebanon war cost Israel $1.6bn

This article was first published on guardian.co.uk on Tuesday August 15 2006. It was last updated at 18:37 on August 15 2006.
An Israeli tank crosses into southern Lebanon.

An Israeli tank crosses into southern Lebanon. Photograph: Uriel Sinai/Getty Images

Israel's month-long war against Hizbullah has cost the country $1.6bn (£850m), or about 1% of GDP, according to initial government estimates. About a third of that went directly to the army.

Most analysts believe the ceasefire arrived just in time to stop the conflict putting a significant brake on Israel's high growth rate, although the economy is vulnerable to any resumption in the fighting.

However, the total bill is unlikely to exceed the approximately $2.5bn Israel receives each year in aid from the US - $2.2bn of that in military grants.

At least 6,000 houses or businesses in the north were destroyed or damaged during the fighting. Much of the region's fruit harvest rotted on the trees because farm labourers spent the month in their shelters. More than a million people were displaced from the north and about a quarter of the region's small businesses had to be saved from bankruptcy by emergency government support, according to Oded Feller, the president of the Chamber of Commerce for Haifa and the north.

On top of that, 30,000 reservists left their jobs around the country when they were called up.

Most importantly, tourism died completely in the northern beach resorts and around the Sea of Galilee and was badly hit in the rest of the country. Even if fighting does not break out again, there are likely to be ripple effects on tourism into next year at least.

With the truce holding for the time being, the Tel Aviv stock market has already recovered to within 2% of its pre-war level and the shekel has also bounced back.

The 5% growth rate of the past three years could be slowed, but perhaps by less than 1%, government economists hope.

"In a couple of months, we can recoup half the losses. The factories will work overtime," said Shraga Brosh, the head of the Manufacturer's Association of Israel.

Foreign investment, which has fuelled the high growth of recent years, is expected to double this year to about $12bn, mostly in the form of acquisitions of Israeli start-ups, he said. "Right now, there is no negative reaction. Those people who plan to invest in Israel are keeping their investment here. People believe the economy is strong."

According to Mr Brosh, the damage would have been much more serious if the war had gone on even a few weeks longer, and such economic considerations may have played a role in the government's decision to accept the UN ceasefire.

Israel's capacity to sustain confidence will depend on whether the truce represents the start of a lasting peace on the northern border or only a lull before the next round in the Arab-Israeli struggle.

The tourist industry is the economy's canary - the first to succumb to the impact of instability - and it has taken a beating. The number of foreign tourists arriving in the second half of the year is expected to halve, a loss that would represent 0.4% of GDP.

"We're getting no future bookings whatsoever. Nobody is coming here," said Mark Feldman, the managing director of Zion Tours in Jerusalem.

There have been a few "solidarity tours" by pro-Israeli groups to help prop up the industry, and there are even "Katyusha tours" of the north.

But Mr Feldman said the tours accounted for little more than 5% of the war losses.

"The economic effects have yet to be felt, and the long-term ramifications are very, very serious," he said. "As British and German companies start planning for 2007, Israel will be omitted from the brochures. So I can't give a figure for loss of income tomorrow."


Latest news on guardian.co.uk

Last updated less than one minute ago

Guardian Jobs

Browse all jobs