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Israel’s vital tech sector to benefit from return of army reservists

Written by The Anand Market

Updated on:

By Steven Scheer and Ari Rabinovitch

JERUSALEM (Reuters) – Israel’s wartime economy will get a much-anticipated boost as the army gradually releases reservists fighting in the Gaza Strip so they can return to their jobs and revive growth that slows down.

Since the October 7 attacks by the Palestinian militant group Hamas, more than 300,000 Israelis have been conscripted into reserves – many from the globally important high-tech sector – leading to a labor shortage work and a gloomy national climate which has hurt consumer spending and which should be expected. to slow down economic growth.

After nearly three months of intense aerial bombardment and a massive ground incursion, Israeli leaders have suggested the war is entering a new phase, with a shift toward more targeted operations aimed at eliminating the Islamist group that rules Gaza and to save the Israeli hostages.

So the military is adjusting its plans to deploy its forces in Gaza and other hot spots, first and foremost by starting to send reservists home — at least for a while.

He declined to give details on the number of his forces, but said the move would “significantly ease the economic burden and allow them to assemble forces for upcoming activities over the next year, as fighting will persist and their services will always be needed.”

Before the war, Israel was heading for solid economic growth of 3.4% in 2023 and 3% in 2024, according to the central bank. Now the economy is heading for a contraction in the fourth quarter and the Bank of Israel projects 2% growth this year and next, or zero per capita growth given the rapid growth of Israel’s population .

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Erel Margalit, who heads one of Israel’s most active venture capital firms, Jerusalem Venture Partners (JVP), said the army had made a calculated decision.

“They understand that you have to free people to go back to work, because going back to work makes Israel stronger,” Margalit said. “Israel is not only strong militarily.”

With inflation slowing, the Bank of Israel on Monday cut its short-term borrowing rates by 25 basis points, to 4.5 percent, its first reduction in nearly four years. Central bank policymakers are keeping an eye on military strategy.

The release of reservists will benefit consumer spending, said Andrew Abir, deputy head of the central bank, which accounts for more than 50% of total economic activity.

“People were called without warning. In the first month it was a real disaster because they were right in the middle of projects,” Abir told Reuters, referring mainly to high-tech companies.

Spouses who have been caring for their families alone since October will also be able to fully return to their jobs, he said. This is good news for the high-tech sector, which accounts for 12% of jobs, more than half of Israel’s exports, 25% of income taxes and nearly a fifth of its overall economic output.

Other signs of economic recovery are showing up in real-time data. Credit card purchases have returned to pre-war levels, Abir said, “a sign that the economy is working again.”

Foreign investment, although it has slowed, has not dried up. Startups raised $1.5 billion in the last three months of 2023 in 75 deals, according to data released last week. In 2023, funding fell to $7 billion, from $16 billion in 2022.

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Geopolitical risks can be off-putting, but they also offer greater upside potential, said JVP’s Margalit.

“There are some really good deals to be had,” he said.

Large, well-funded tech companies have mostly weathered the war, and some have even prospered. Smaller businesses, especially those hoping to complete their first rounds of financing when the war broke out, have had a tougher time.

In some cases, Margalit said, JVP and its investor partners have had to inject more funds into these companies in order to “extend runway.”

Pini Yakuel, CEO of marketing data company Optimove, said it recorded strong growth in the fourth quarter, despite the fact that 41 of Tel Aviv’s 240 workers were drafted into the reserve.

“We have adapted. It’s a new reality,” he said. “We just kind of kept going. Focused on what’s most important. Some things were put on hold, some things were delayed, but you continue to execute.”

His company suspended non-critical projects and relied on overseas offices to help cover the load. And things will become easier with the gradual return of absent employees.

“I notice in the office, ‘Oh hey, you’re back.’ “Yeah, I’m back.” “Is it for good? “No, for the next month. Then they will tell us whether we should go back (to the reserve) or not.”

The government has taken steps to protect the sector. The state-funded Israel Innovation Authority has created a $100 million fund to help early-stage startups.

“We all did our part,” Bin said. “CEOs and employees realized that if they wanted to sustain the success of the company and their jobs, they needed to refocus on their work.

“Despite all the empathy we feel from the tech industry globally, at the end of the day, when customers overseas need delivery, they can’t say they have not received their deliveries because of the war in Israel,” he said.

(Reporting by Steven Scheer; Editing by Toby Chopra)

Copyright 2024 Thomson Reuters.