Israel's economy is in good shape to weather the cost of its offensive against the Lebanese Hizbullah movement, but the costs of compensation to the rocket-hit north, loss of tourism receipts and the blow to consumption have led analysts to downgrade this year's growth forecasts.
Before the conflict erupted three weeks ago, Israel's budget was in surplus thanks to booming tax revenues and reform enacted in recent years. There was even talk of cuts in the country's defence spending, previously a sacred cow protected by entrenched political and military interests.
Defence spending has risen by up to Shk2 billion (€357 million) this year, and a planned Shk2 billion cut in 2007 has been scrapped, with the total cost to the economy estimated at €1.8 billion so far. Gross domestic product growth forecasts have been cut to at least 4.5 per cent from over 5 per cent.
"The conflict means the surplus has evaporated but there is scope for further cuts in the budget, such as not spending on unnecessary defence equipment or further reducing the universality of welfare spending and moving towards more means-testing," said Philip Landau, a financial consultant.
As military planners appeared headed towards widening the battle against Hizbullah, government ministries have prepared optimistic and pessimistic scenarios to assess damage to the economy, according to the Globes business website.
In the happier forecast, a ceasefire and long-term arrangement in Lebanon reached within a couple of weeks, rather than months, would limit GDP losses to half a percentage point and compensation to businesses would not cost more than €625 million. Under a more gloomy scenario, a protracted conflict would shave up to 2 percentage points from GDP and cost about €3.57 billion over the next year or so.
Financial markets appear to have settled on the former picture, having performed robustly in the last few weeks.
The performance of the markets would appear to contradict Hassan Nasrallah, who claimed recently that the Israeli media was hiding the true extent of the conflict's cost.
"Can it conceal the enormity of the economic and financial damage inflicted on the [ Zionist] entity? I leave the explanations to the specialists in this field," he told Al Manar television in a broadcast aired last Saturday.
The government has promised compensation to tourism and businesses in the north of Israel, where at least 300,000 residents have fled the region, while many of the total population of one million are hiding in bomb shelters.
The total cost of aid, including wages and indirect financial damage, was not yet known.
Tourism, with most revenues made in July and August, has been hit. "There have been at least 20 per cent of cancellations from overseas," said tourism minister Isaac Herzog.
The strength of the Israeli economy is illustrated by both the stock market and shekel, which are hovering around levels seen before Israel's offensive against Hizbullah in Lebanon started three weeks ago.
Financial markets fell sharply just after the conflict began, particularly shares in companies exposed to domestic demand but also export-oriented businesses.