Crucial math: Key economic implications of the Gaza conflict
The Gaza conflict is now in its fourth month.
The besieged enclave, that housed more than two million residents at the start of the clash, has been the epicentre of one of the most harrowing atrocities of modern times.
While the Israeli onslaught has been largely restricted to the Gaza Strip, with spillover effects across the MENA region, the conflict’s economic and social impact has resonated far and beyond.
In the aftermath of the conflict that began on October 7, global companies and brands took strong postures and lent support. But in times of social activism and consumerism, several businesses fell short of assessing consumer sentiment.
Companies that backed Israel despite its ostensible atrocities towards Gazan civilians or those that disparaged Palestinian plight by insensitive advertising, received considerable blowback.
The backlash came in the form of indignation, denouncements and product/brand disengagement. Meanwhile, investor confidence took a hit, which in turn, impacted investments and key inflows.
"The readiness of consumers committing to the boycott of anti-Palestinian brands really highlights a shift in perception of the situation in Palestine. We’re seeing that - in the West especially - government policies and opinions do not align with the general public. We’re no longer apathetic to the struggles of Arabs & Muslims in the Middle East - and this isn’t just among the Muslim community - we’re seeing people from different backgrounds come together to take a stand against that outright support of the apartheid," says Raees Sayed, co-founder at Ummazing, a UK-based Muslim-friendly business directory.
Several weeks into the conflict, tangible economic effects have begun to manifest, with key industries and companies realising a considerable impact.
F&B
Fuelled by anger at the West for their lacklustre efforts to help halt the offensive in Gaza, customers denounced foreign brands, leading to dwindling sales, and advertising realignments. Some faced strong consumer reprove for showing ostensible support towards Israel.
In a note published on LinkedIn beginning January, Chris Kempczinski, president, and chief executive officer at McDonald's Corporation, recognised that several markets in the Middle East and some outside the region were experiencing a “meaningful business impact” due to the war and associated misinformation.
While Q4 and other comparable financial results for the food giant are yet to be released, the broader consumer sentiment across the Middle East region towards the brand remains grim. McDonald’s Israel currently runs a restricted Instagram profile, unavailable in select regions.
Starbucks Corporations’ market capitalization stood at $121.87 billion on November 16, which marked its Red Cup Day promotion, and has diminished since to $105.32 billion (January 31), according to YCharts.
Americana Restaurants, operator of global brands KFC, Hardee’s and Pizza Hut across the MENA region, has slashed almost 100 jobs in an internal restructuring and amidst consumer disengagement of its brands, following the start of the regional conflict.
Most of the layoffs were at the company’s headquarters in Dubai, according to a Bloomberg report in end January, citing a company representative. Americana employs more than 40,000 people, according to its website.
“The boycotts against major food brands like McDonald’s, Starbucks, and Coca-Cola, stemming from their perceived pro-Israel stance, underscore a potent consumer sentiment in the Arab world,” says Iman Ali Liaqat, consultant at DinarStandard.
“For instance, McDonald's in Malaysia cited boycotts for a notable dip in profits, leading to closures and job cuts. In Egypt, shifts in consumer choices have caused a reported 50% slowdown in demand for suppliers to these international brands. This has led to a marked preference for local alternatives, especially in regions with restricted public expression.”
“The situation presents a strategic opportunity for Muslim brands to cater to this demand, highlighting the importance of aligning brand values with consumer beliefs. It's a powerful demonstration of how consumer choices can influence market dynamics and create spaces for new players.”
Technology
The Israeli tech sector received a blow, with the conflict chipping away at investor confidence and investments.
High-tech investment deals totalled 76 in the fourth quarter of last year, compared to 136 during a year-earlier period, according to a report by Israeli research institution IVC. The Q4 deals value came in at $1.45 billion, down 15% in capital raised and 16% in number of deals, compared to the third quarter.
“Israeli high-tech unicorns also had a tough year in 2023, with the lowest number of transactions since 2015 – just 14 rounds, compared to 36 in 2022. The amounts raised ($1.83 billion) were down 51% from the $3.73 billion raised in 2022,” the Israeli Tech Review 2023 report added.
But IVC’s report pointed towards a broader trend. “Q4 is one part of the Israeli tech story during 2023, in which the investment sentiment towards Israel – as a country, not a technology hub – certainly took a hit”.
Finance
Mergers and acquisitions and IPOs in 2023 totalled $7.5 billion, dropping 56% in deal value from $16.9 billion in 2022, and down 91% from a record $82.5 billion in 2021, PwC Israel’s Exit Report 2023 stated. The study assessed exist deals of over $10 million in value.
Three IPOs were completed last year, down from 13 in 2022, and 72 in the year prior.
The Israeli government approved an update to the 2024 state budget in January, which stands at 582 billion shekels ($157 billion), reflecting an increase of about 70 billion shekels ($18.89 billion) in spending.
The budget includes "a significant addition to the defense budget", the Israeli ministry of finance said in a statement.
The update anchors a projected deficit of about 6.6% of GDP for 2024.
Travel & tourism
The travel and tourism sector was also one of the hardest hit. The total number of tourists to Israel, barring day visitors and cruise passengers, totalled 52,800 in December 2023, down 80% year-on-year, according to Israeli tourism ministry figures.
While the future of travel looks promising, it is laced with a tinge of worry. According to International Air Transport Association (IATA) forecasts announced in December 2023, some 4.7 billion people are expected to travel in 2024, topping pre-pandemic levels of 4.5 billion in 2019.
This is expected to be complemented by a record $964 billion in revenues for the current year.
However, the organization also outlined several risk factors – including war - that could impact the fragility of the industry’s profitability.
“The operational impacts of the Ukraine war and the Israel-Hamas war have been largely limited to re-routings due to airspace closures. An unexpected peace in either or both cases would bring benefits to the industry, but any escalation could produce a radically different global economic scenario to which aviation would not be immune,” IATA said.
Trade
Trade disruptions in the Red Sea due to Houthi attacks on commercial vessels have spiked regional tensions as well as impacted the shipping industry, forcing re-routing of vessel traffic via alternative pathways.
Nearly 30% of the world’s container trade traffic usually passes through the Red Sea, and more than 90% of those ships have diverted since December, research firm BMI said.
Costs for transporting a 40-foot container from Shanghai (China) to Rotterdam (Europe) stood at $4,406 on January 11, spiked to $4,951 a week later (Jan 18), and further north to $4,984 on January 25, according to the Drewry World Container Index.
Keaton Fitzpatrick, an operational risk analyst at BMI, said that with the situation at hand, route diversification options are quite limited.
“Rerouting via the Cape [of Good Hope] adds around 10-15 days to transit times and it requires significantly more fuel, and this can lead to an increase in demand for refuelling at African ports.”
