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Israel’s economy should weather Lebanon war

ISRAEL’S war with Hizbollah guerillas in Lebanon should not derail the Jewish state’s robust economy as long as fighting ends soon.

The US$130 billion economy has ridden a wave of positive sentiment since 2004 and is

headed for a second straight year of growth above 5% on strong exports, a revival of consumer spending and heavy foreign investment.

That has boosted tax income, allowing Israel to maintain tight fiscal discipline and bring down its high public debt.

But a week-long offensive against Hizbollah after the group seized two Israeli soldiers and killed eight others in a cross-border raid has taken some steam out of the economy.

Syrian and Iranian backed Hizbollah has fired 900 rockets across northern Israel, including Haifa — the country’s third largest city — forcing many of the region’s million residents into bomb shelters or to flee south. Haifa’s key seaport has been closed.

The rocket attacks have killed 15 Israeli civillians.

Tourism, a key economic driver which had been expected to reach near record levels this year, has also been hit hard.

Israel’s bombardment of Lebanon has killed more than 300 people but failed to stop Hizbollah rocket strikes.

Business leaders estimate the damage to the economy is as high as 500 million shekels (US$112 million) a day in lost output from the full and partial closure of many of the more than 1 500 factories in the region, lower employment and empty hotels.

Less than 30% of factories in the north are operating normally and 35% of workers are only partly working, according to the Manufacturers’ Association. “The sooner the mini-war ends, the lower the economic cost,” said Leo Leiderman, chief economist at Bank Hapoalim.

“If it’s a short conflict — four weeks — that ends with a political resolution and a return back to normal life in the north, there will be some economic impact this year but not next year,” he said.

Leiderman said growth in 2006 should be 4,7 to 4,8%, down from his previous estimate of 5,2%. Bank Leumi economists cut their forecast to 4,5% this year.

“War is unpleasant, but if Israel could have chosen the economy’s best point for being attacked, this is the best timing because it is facing this challenge from very, very solid ground,” said Ella Fried, head of research and development at financial information publisher Dun & Bradstreet Israel.

“It would have been much more difficult two years ago,” she said, referring to a period when the economy was starting to recover from several years of a Palestinian uprising and shattered tourism.

How long the Lebanon offensive will last is anyone’s guess. Israeli leaders have said there will be no let up until Hizbollah frees the soldiers and is disarmed.

Israel has made clear to diplomats in recent days that it wants one to two more weeks to pound Hizbollah before the international community intervenes to stop the fighting.

In that case, consumer confidence buoyed by a sharp drop in Palestinian suicide bombings should remain high and spending levels that are dipping at the moment should rebound quickly, economists say.

Factories could recover some lost output as employees work overtime, analysts said.

“There is enough cushion to absorb this kind of shock,” Leiderman said. “And since the economy is growing, the budget seems … able to deal with this.”

He cautioned that Israel’s economy could suffer if the conflict dragged on and was compounded by the start of another Palestinian uprising and resumption of suicide bombings. Foreign investors have not been deterred. Financial markets have been fairly stable with stock prices and the shekel only down slightly since last Wednesday. Those that are selling are Israelis, not foreigners. — Reuter.

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