Impact of war on an economy

Subject :Economy

Context: Estimates of the economic impact of the war prompted Moody’s to lower its growth forecast for the Israeli economy for this year to 2.4% from 3% previously. In a more pessimistic outlook for 2024, the ratings agency said it projects a contraction of around 1.5% followed by very moderate growth in 2025.

The war with the Hamas terror group is costing Israel at least NIS 1 billion ($269 million) per day and is poised to take a bigger toll on the country’s economy than previous conflicts, according to a report by global ratings agency Moody’s based on an initial estimate by the Finance Ministry.

The impact of war on an economy can be multifaceted and depends on various factors, including the scale of the conflict, the duration of the war, the economic structure of the country, and the global geopolitical context.

Costs of Military Operations: Funding military operations, including the procurement of weapons, salaries for personnel, and other associated costs, can place a significant financial burden on the government. This can lead to increased government debt and the need for additional financing.
Infrastructure Damage: Wars often result in damage to infrastructure, including roads, bridges, power plants, and communication networks. The cost of rebuilding and repairing these structures can be substantial, affecting the overall economic output.
Displacement of Population: Wars may lead to the displacement of people, both within the country and as refugees. This can strain social services, increase demand for humanitarian aid, and create challenges for the labor market.
Impact on Trade: Wars can disrupt trade routes and relations, affecting the import and export of goods. Trade disruptions can lead to shortages of essential goods, inflation, and a decline in economic activity.
Investment Uncertainty: Ongoing conflicts create an environment of uncertainty, deterring both domestic and foreign investment. Investors are generally cautious in situations of political instability and armed conflict.
Human Capital Loss: Loss of life and injuries among the working-age population can lead to a decline in human capital. This loss can have long-term effects on labor productivity and economic growth.
Social and Humanitarian Costs: Wars often result in significant social and humanitarian costs, including increased poverty, malnutrition, and health crises. Rebuilding social structures can take years, impacting overall human development.
Global Economic Effects: In a globally interconnected world, regional conflicts can have spillover effects on the global economy. For example, disruptions in the supply of critical resources or energy can impact countries far beyond the conflict zone.
Global Economic Trends: The war compounds existing adverse global economic trends, including rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation.
Impact on Inflation: Fuel and food shortages caused by the war exacerbate post-pandemic inflation, which was already at multi-decade highs globally.
Supply Chain Disruptions: Supply chain disruptions, exacerbated by a sudden surge in demand, contribute to inflation. The strain on supply chains existed even before the conflict
Risks to Central Banks: Central banks may need to raise interest rates to curb inflation, but the extent and duration of rate increases remain uncertain. Prolonged high inflation could pose challenges to central bank credibility.
Fiscal Policy Challenges: The war’s short-term impact on fiscal policy is modest compared to pandemic-era stimulus programs. However, the long-term effects could be significant, especially if there’s a shift in fiscal priorities, such as increased defense spending.
Inflation and Globalization: Globalization, viewed as a “secret sauce” for bringing down inflation in the past, could face challenges due to deglobalization. The interconnectedness of economies and supply chains plays a crucial role in shaping inflation dynamics.