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Last Updated: Friday, 4 August 2006, 15:38 GMT 16:38 UK
Israel's economy copes well - for now
By Jorn Madslien
Business reporter, BBC News

Bank of Israel governor Stanley Fischer's insistence that his country's economy will escape relatively unscathed from the ongoing conflict stands in sharp contrast to the enormous damage being done to Lebanon's.

Power station near the southern Israeli city of Ashkelon
A month ago, the Israeli economy was storming ahead

"There is damage to the [Israeli] economy," Mr Fischer acknowledged.

But he predicted that the economy's growth rate was likely to slip by "less than 1%".

Growth this year should thus come in at 4.5%, weaker than last year's 5.2% growth rate and well below earlier predictions of 5.5%.

But the overall message is that Israel is coping successfully - unlike Lebanon, where transport and public works minister Mohammed al-Safadi estimated the damage caused so far at $2bn (1bn).

That's an expense the country can ill afford, given that it had just got back on its feet after the 1975-1989 civil war.

Tourism compensation

Broadly speaking, the $130bn Israeli economy is holding up well, while Lebanon's has, in the words of Prime Minister Fuad Saniora, been shattered.

But Israel is feeling the pinch in some areas.

The country's tourism industry started suffering as soon as the crisis began to escalate, and it has got worse since.

Many tourists who were there when war broke out have left and many of those who had planned to come during the peak season are not turning up.

Israel has seen a 20% drop in tourism since the war begun.

But the industry is not displaying any signs of panic, largely because the government has said it will compensate the sector for its losses.

Market strength

Industrial output has also slipped since the start of the war.

Many tourists are staying away from Israel

Some factories have been closed for short periods. Mobile phone firm Motorola has warned that its Israeli production facilities are suffering disruption.

"We also sell our products and services throughout the Middle East and demand for our products and services could be negatively impacted by the hostilities," Motorola said in a statement.

Such gloom is far from universal, though.

The shekel remains strong, having bounced back following last week's interest rate rise, and the stock market has rallied back to roughly where it was before the conflict began.

Deals - including large mergers and takeovers - are still being done and foreign investors remain interested in Israel.

Traditionally, dealers in both currency and stock markets tend to pull out during times of crisis.

The fact that they have not done so en masse this time means they believe Israel's economy remains fundamentally sound.

"After they understood that Israel will stick to its macroeconomic policies, the markets started to return to prior levels," said Mr Fischer earlier this week.

Uncertainty remains

Israel is confident that it can comfortably carry the cost of war.

On the face of it, the extra military spending could threaten Israel's continuing recovery, when coupled with a fall in government earnings from taxation and VAT due to the sharp drop in economic activity - particularly in the North of the country.

The effect on the [Lebanese] economy is going to be very, very drastic
BLC Bank's chairman, Shadi Karam

But the central bank estimates that the country's budget deficit should rise by only 0.6% because of the ballooning military budget.

The overall effect of the extra spending and the fall in receipts should knock 2% from the country's economic output in 2005, according to Mr Fischer, who also thinks Israel should meet its 2% budget deficit target for 2007.

Rising inflation poses another threat to the Israeli economy.

"Due to these events, inflation is expected in the short term to rise above its previously expected level," according to Mr Fischer.

"The Bank of Israel, in conducting monetary policy in the coming months, will need to take into account both the possible rise in inflation and the likely slowdown in activity."

None of this is the sort of language employed by someone running an economy in crisis, and indeed Israel remains healthy for the time being.

But future projections all depend on a quick peace, however, so the guardian's of Israel's economy can not afford to be at all complacent.

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