Israel‘s wartime economy will get a much-awaited boost as the military gradually releases reservists fighting in the Gaza Strip so they can return to their jobs and jump-start softening growth.

Since the Oct. 7 attacks by the Palestinian terrorist group Hamas, more than 300,000 Israelis were drafted to reserve duty — many coming from the globally-important high-tech sector — leading to labor shortages and a gloomy national mood that hurt consumer spending and is expected to dent economic growth.

After nearly three months of intense air bombardment and a massive ground incursion, Israeli leaders have hinted that the war is entering a new phase, with a shift towards more targeted operations aimed at eliminating the Islamist group that rules Gaza and rescuing Israeli hostages.

The military accordingly is adjusting deployment plans for its forces in Gaza and other hot spots, first and foremost by starting to send reservists home — at least for a while.

It declined to share specifics about its number of forces, but said the move will “significantly alleviate economic burdens and enable them to gather strength for upcoming activities in the next year, as the fighting will persist, and their services will still be needed.”

Prior to the war, Israel was headed for solid economic growth of 3.4 percent in 2023 and 3 percent in 2024, according to the central bank. Now, the economy is headed for a fourth-quarter contraction and the Bank of Israel sees 2 percent growth this year and next, or zero growth per capita given Israel‘s fast-growing population.

Erel Margalit, who heads one of Israel‘s most active venture capital firms, Jerusalem Venture Partners (JVP), said the military made a calculated decision.

“They understand you need to go release people to go back to work because going back to work makes Israel stronger,” Margalit said. “Israel is not only strong militarily.”

START-UPS

With inflation easing, the Bank of Israel cut short-term borrowing rates by 25 basis points to 4.5 percent on Monday, its first reduction in nearly four years. The central bank’s policy makers are keeping an eye on the military’s strategy.

The release of reservists will benefit consumer spending, said deputy central bank chief Andrew Abir, which accounts for more than 50 percent of total economic activity.

“People were called up with no warning. In the first month, there was a real mess, because they were in the middle of projects,” Abir told Reuters, referring mainly to high-tech firms.

Spouses who may have been caring for their families alone since October will also be able to return fully to their employment, he said. This is good news for the high-tech sector, which accounts for 12 percent of employment, more than half of Israel‘s exports, 25 percent of income taxes, and nearly a fifth of its overall economic output.

Other signs of economic recovery in real-time data are emerging. Credit card purchases have returned to pre-war levels, Abir said, in “a sign the economy is functioning again.”

Foreign investment, while it has slowed, has not dried up. Startups raised $1.5 billion in the final three months of 2023 in 75 deals, according to data published last week. In 2023, funding fell to $7 billion from $16 billion in 2022.

Geopolitical risks may be off-putting, but they also offer a bigger potential upside, said JVP’s Margalit.

“There are some very good deals to be had,” he said.

Larger, well-funded tech firms have mostly weathered the war, and some have even thrived. Smaller companies, especially those that were hoping to close early financing rounds when the war broke out, have had a harder time.

In some cases, Margalit said, JVP and partner investors have had to inject more funds into these firms in order to “extend the runway.”

STATE SUPPORT

Pini Yakuel, CEO of marketing data firm Optimove, said they saw strong growth in the fourth-quarter despite having 41 of 240 workers in Tel Aviv drafted for reserve duty.

“We’ve adapted. It’s a new reality,” he said. “We just kind of, like, pressed on. Focused on what’s most important. Some things were paused, some things were delayed, but you continue to execute.”

His company put non-critical projects on hold and relied on offices abroad to help cover the load. And things will get easier as the absent employees slowly return.

“I notice in the office: ‘Oh hey, you’re back.’ ‘Yeah, I’m back.’ ‘Is it for good?’ ‘No, for the next month. Then they’re gonna tell us if we need to go back [to the reserves] or not’.”

The government took steps to protect the sector. State-funded Israel Innovation Authority set up a $100 million fund to help early stage startups.

In its recent survey, half of young companies only had sufficient funding for six months, said Dror Bin, the authority’s CEO. His fund has invested about $41 million so far.

“We all got our act together,” Bin said. “CEOs and employees realized that if they want to sustain the company’s success and their jobs they needed to refocus themselves on work.

“Despite all the empathy we get from the tech industry globally, at the end of the day when customers abroad need to get deliveries they can’t say that they didn’t get the deliveries because of the war in Israel,” he said.

($1 = 3.6437 shekels)

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