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Israel's small businesses bear brunt of war's losses

But hostilities not expected to hurt nation's economy

JERUSALEM -- Economists say Israel's war with Hezbollah guerrillas should not derail the Jewish state's robust economy, as long as fighting ends soon. But don't tell that to shop owners, taxi drivers, and tour guides.

The nonstop barrage of Hezbollah missiles is devastating their small businesses in northern Israel, from the port of Haifa to Nazareth.

Tour guide Jonathan Cutler said business began to go downhill July 13 -- the day after the fighting started -- as he was leading a family of four from Oakland, Calif., on their dream trip to Israel, which was to include stops in the Golan Heights, Hula Valley and the Galilee in the north.

``We were on our way to Rosh Hanikra, beautiful white chalky cliffs on the border with Lebanon, and stopped in the city of Nahariya for lunch. We heard the shelling going on up the road," he said.

``The company I was working for had me take the family to Safed, a city of ancient Jewish tradition. But that was a mistake. We heard distant shelling all night, and as we left Safed the next morning, the first Katyusha rockets started to land there," Cutler said.

Since then, Cutler, a New York native who has lived in Israel for 12 years, has seen his full summer load of Americans canceled.

The fighting in Lebanon began two weeks ago when Hezbollah guerrillas killed three Israeli soldiers and captured two others in a cross-border attack. Israel responded with air strikes and, later, a ground offensive. Hezbollah has fired hundreds of rockets at northern Israel.

On Monday, the Bank of Israel said the country's $130 billion economy is still headed for a second straight year of strong growth. If a cease-fire is reached soon, the economic damage will be relatively small, though it could reach up to 1 percent of gross domestic product, the bank said.

Standard & Poor's said Tuesday that thanks to a strong first half, it still expects 4 percent GDP growth in 2006.

``So far the damage is not that big to the Israeli economy. Clearly, all economic activity from Haifa to the north is partially paralyzed. We are talking about 20 percent of Israel's population, 1.2 million," said Leo Leiderman, chief economist at Israel's Bank Hapoalim.

Israel's financial markets have been fairly stable, with stock prices recovering after a loss at the beginning of the fighting and the shekel strengthening after an initial drop against the dollar.

Pnina Shaleva, a spokeswoman for Israel's Hotel Association, said she understood the fate of small businessmen like Cutler. Tourism, a key economic driver that had been expected to reach near record levels this year, has been hit hard.

Hotels across Israel, not just the north, have suffered a rash of cancellations for the rest of the year, she said. ``We estimate hotels in the north will lose about 123 million shekels [$27 million] in the first month after the start of the Lebanon offensive," she said in an interview.

That means in major tourist destinations such Nazareth, taxi drivers, restaurant owners, and even falafel stands have been hit.

The Manufacturers' Association said that the limited activity of factories in Haifa and the north has cost the industry $67 million to $89 million during the two-week-old battle.

About 35 percent of the 1,800 factories and small manufacturers in the region closed and about 35 percent were operating partially, the association said.

Uriel Lynn, president of the Federation of Israeli Chambers of Commerce, said importers and exporters who normally use Haifa's port also were suffering as many ships were diverted to the southern port of Ashdod.

The 260 rockets that hit Nahariya crushed the economy of the coastal town of about 50,000.

On Tuesday afternoon, only one supermarket was open, the streets and sidewalks were nearly empty. Most residents had fled south.

Sitting on a stool outside his Hof Hadekel, or ``Palm Beach," supermarket, Yasser Aslan said he has lost more than $222,000 a week since the fighting began in Lebanon.

Owners of some small shops in the north have been trying survive by driving to cities such as Tel Aviv to sell goods on the streets.

The question remains: What is the chance of the economic damage spreading? Leiderman said if a cease-fire is reached in a week or two, Israel will lose up to 1 percent of GDP, leaving growth at about 4.5 percent. But, ``the longer it takes for a cease-fire to be reached, the more uncertain the final outcome will be," he said.

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