How the War With Hamas Has Damaged Israel’s Tech Firms and Economy

At 6:45 a.m. on Oct. 7, Jack “Tato” Bigio, the founder of the technology company UBQ Materials, talked to his chief operating officer, who said that terrorists were on his kibbutz. Other employees texted that they were hiding in safe rooms, and one said her husband had been shot in the stomach.

“It was like doomsday,” Mr. Bigio said.

The attack by Hamas on Israel forced UBQ Materials to shut its plant, located 20 miles from the Gaza border, and left its work force in shock. Two employees were murdered. Many lost their homes and were relocated 100 miles away.

Founded in 2012, UBQ Materials uses technology that turns household garbage into a plastic substitute used to make tables and chairs, McDonald’s trays, and car parts for Mercedes-Benz. The company was able to get up and running within three weeks, but many others are facing continuing problems with operations and financing.

About 23,000 Palestinians have been killed by Israel since Oct. 7, according to the Gazan health ministry, which does not distinguish between deaths of civilians and fighters. About a million evacuees from the territory’s north have fled south. The strip has suffered widespread destruction, with hunger, disruption of water, electricity and communications networks, and limited medical care as many hospitals have sustained damage.

In Israel, the Hamas attacks on Oct. 7 killed 1,200 people and resulted in hundreds being taken hostage, including more than 100 who are still held in Gaza, according to the Israeli authorities. The war has upended life, as hundreds of thousands of reserve soldiers were called up, and 200,000 people have been displaced from border areas in the north and south.

In ways that are often less visible outside the country, the war has also hurt Israel’s economy. Tourism has come to a virtual standstill, and government spending has jumped. The hit to tech companies has shaken confidence in a sector that has become a key driver of Israel’s economy.

The call-up of 350,000 army reservists disrupted operations at many companies. Many customer orders were put on hold or canceled outright, and investors were getting cold feet, according to a survey by the Israel Innovation Authority, a government-funded agency, and the Start-Up Nation Policy Institute.

Israel’s technology sector has grown rapidly over the past decade and accounts for almost half of all exports and a fifth of economic output, the Israeli Innovation Authority said.

As a result, the Organization for Economic Cooperation and Development said, the war will cause a “temporary but pronounced slowdown” of Israel’s economy. It had grown about 3 percent before the Oct. 7 attacks and is now expected to slow to 1.5 percent this year. Weighing on the economy are labor shortages, lower consumer and business confidence, and higher inflation.

Another concern is foreign investment, which was already weak before Oct. 7 because of uncertainty caused by the dispute between Prime Minister Benjamin Netanyahu’s right-wing government and Israel’s Supreme Court, said Jonathan Katz, a former economic forecaster in the Israeli Finance Ministry.

“Now the question is whether foreigners will still want to invest in Israeli high tech, or if they’d rather invest their money in some place that’s safe and quiet, like Ireland,” Mr. Katz said.

To stimulate the flagging economy, the Bank of Israel cut interest rates by a quarter point, to 4.5 percent, last week. It was its first rate cut since the start of the Covid pandemic, and the governor of the central bank, Amir Yaron, said additional cuts were expected.

Mr. Yaron has said that the economy was already adjusting to the war conditions and showing signs of recovery, but that the ramifications of the prolonged hostilities would be significant.

In particular, he emphasized the importance of stability and the need to rein in soaring government spending, which the central bank expects to contribute to more public debt and higher deficits.

“It is clear to us all that the current economic uncertainty is connected very closely to the security situation and how the war will develop,” Mr. Yaron said.

Israel has taken several steps to tamp down the uncertainty, including stabilizing the Israeli shekel. The government is planning to increase the number of foreign workers allowed in the country to 70,000, from 50,000, to address a sudden labor shortage. Workers from abroad have fled and more than 100,000 West Bank Palestinians have been barred from working in Israel.

In recent weeks, the military has also started withdrawing several thousand troops from the Gaza Strip, at least temporarily, in part because of the economic toll of such a massive deployment of reservists.

Still, Mr. Yaron issued a stern warning on Jan. 1 to Mr. Netanyahu over fiscal priorities at a time when more spending must be directed to defense and security and pressing domestic needs, like making the communities near the Gaza and Lebanese borders habitable after they came under attack from Hamas and Hezbollah militants. Criticism of the Netanyahu government’s funding of West Bank settlements and the ultra Orthodox has intensified since the war.

“Not acting now to adjust the budget via cuts in expenditures, removing redundant ministries and increasing revenues in view of the needs of the war is likely to cost the economy much more in the future,” Mr. Yaron said.

The war in Gaza, one of the longest Israel has ever waged, is already reverberating throughout the economy.

Construction, which represents 14 percent of Israel’s economy, has slowed because of the labor shortage. Though volunteers have been pitching in, the departure of foreign workers and loss of Palestinian labor have meant that fruit and vegetables were left rotting on trees and in fields.

In addition, some imports are in short supply because attacks by Houthi rebels in Yemen have disrupted transport through the Bab el-Mandeb Strait.

Tourism took an immediate nosedive on Oct. 8, just as it was recovering following the Covid pandemic, government officials said.

“There’s nothing — no Israeli tourists, no non-Israeli tourists, no weddings, no henna celebrations before the weddings, no house warmings. No one is celebrating,” said Tomer Bent, who runs the King David Treasures, a Judaica store on Jerusalem’s popular Ben Yehuda street arcade, which is usually teeming with people eating pizza and falafel or having coffee at sidewalk restaurants.

“But it will get better,” Mr. Bent said, and pointed skyward, “We believe in Him.”

Stores on Ben Yehuda used to stay open until midnight in late December, when American tourists visited during the winter break and Christmas holiday, said Moshe Saudi, who was staffing a souvenir shop. Now they are closing early.

The Israel Innovation Authority has $100 million in government funds to support technology companies, especially startups that have lost financing. The sector was encouraged by last month’s announcement that the semiconductor giant Intel would proceed with a planned $25 billion investment to expand a chip factory in southern Israel, after receiving a $3.2 billion grant from the government.

“All our entrepreneurs understand that regardless of how much our customers abroad support us and empathize with us, if we cannot meet our commitments they have to move on,” said Dror Bin, general manager of the Innovation Authority.

Shortly after the war erupted, the organization started a new promotional campaign to boost confidence in Israeli tech companies, despite the war. The slogan: “Israeli tech delivers. NO MATTER WHAT.”