High cost of isolation. The impact of conflict with Israel on the Gaza Strip's economy

The conflict between Israel and Hamas is escalating. Recent news focused on the intensive bombings that have led to the Gaza Strip losing access to electricity and communication.

Israel's actions are a response to the assaults by Palestinian extremists, who infiltrated Israel's territory in early October, killing several hundred attendees of a music festival. They have also taken many hostages. The death toll from Hamas attacks has surpassed 1200.

The bombardments do not just represent a humanitarian crisis but are also crippling the Gaza Strip economically. The area's economy is among the smallest and most vulnerable—so, what forms its foundation?

Grzegorz Dróżdż, an analyst at Conotoxia Ltd., provides an analysis. He also proposes potential impacts of the conflict on oil and gold prices.

One significant fact is that the Gaza Strip is one of the world's poorest and slowest-developing areas. Its prolonged isolation and ongoing conflict have caused substantial delays in its economic development, notably compared to the West Bank.

The International Monetary Fund estimates Gaza Strip's per capita GDP in 2022 was just a quarter of that in the West Bank, with far higher poverty and unemployment rates. Both territories are inhabited by nearly 5 million people, with 2 million in the Gaza Strip, where 98 percent of the population is Sunni Muslim, he explains.

Gaza's isolation, coupled with restrictions on imports and human movement since 2006, have led to a spike in unemployment, affecting 45 percent of the population, and severe poverty, impacting 53 percent of the inhabitants in 2022. In comparison, these rates are only 13 percent and 14 percent in the West Bank respectively, the analyst emphasizes.

Unemployment among the youthful majority of the Gaza Strip's population has surged past 60 percent. Many locals depend on various aid initiatives, including medical support, to survive.

Despite numerous challenges, especially electricity access, Gaza Strip's per capita GDP (denominated in dollars) has been unchanged for the past 16 years, mainly because of governmental expenditure.

An expert points out, the sectors showing the most growth were construction, services, and agriculture—with the former seeing an average annual growth rate of 20 percent throughout the blockade period.

Despite harsh conditions, the Gaza Strip has managed to subsist primarily due to agricultural development. Soil-less hydroponic cultivation has been instrumental in this success, despite initial inefficiency. However, it eventually became so productive that agricultural export has been climbing by 13.5 percent annually since 2015.

This trend, combined with import restrictions, has enabled the Gaza Strip to become a net exporter by the end of this period. Nonetheless, the region's energy crisis has seen the industrial sector's stagnation for many years due to dwindling investment levels, summarizes our expert.

This conflict has unfolded in a region responsible for 32.7 percent of global crude oil production, according to OPEC data. However, the conflict's impact on oil prices has not been significant. Even with the increased tension, prices rose by only around 2 percent, after an initial short-term shock.

Slight inaccuracies exist in this data. Neither Israel nor any of its neighboring countries are OPEC members. Iran, openly supporting Hamas' actions in the Gaza Strip, is expected to be most affected by the conflict. As it is, unless the conflict intensifies significantly, the oil market reaction will likely be moderate compared to the response following Russia's invasion of Ukraine.

Nevertheless, oil prices may continue to rise. According to OPEC's report, the oil deficit could reach 3.2 percent in the final quarter of this year and average 2.3 percent throughout the coming year given the current production levels—comparable to the shortage levels noticed in 2021.

The conflict between Israel and the Palestinians has influenced gold prices. Since the escalation in Gaza, the price of gold has surged by over 8 percent, getting close to the support level of 2000 dollars (a point from which prices will bounce upwards).

These price hikes coincide with increasing uncertainty regarding the geopolitical situation in Israel, enhancing gold's reputation as a "safe haven" for investors.

What about the West Bank's situation? An Al Jazeera report reveals that the escalating conflict has significantly impoverished society. For instance, drivers who could earn up to 100 dollars a day now make only a quarter of that amount on average.

According to Al Jazeera, the West Bank is in a state of paralysis, with "main checkpoints closed, cafes and university halls empty, stores running out of supplies, and travel between cities and villages becoming hazardous" - leading to a vast reduction in shopkeepers' earnings.

Sales have plummeted by 50 percent, and we are grappling with significant hurdles in transporting agricultural products—a fruit and vegetable shop owner told the broadcaster.

"There are no jobs here," a city bus driver added.

Rashad Yousef, head of policy and planning at the Palestinian Authority's Ministry of National Economy, believes that the strained relations with Israel have harmed the economy for several years.

Yousef pointed out they used to earn 1.2 billion dollars from the laborers working in Israel, helping build settlements. This source of income was crucial to the economy, but as it stands, only about 5 percent of these workers are still engaged.

Highlighting the implications of the escalating conflict, Yousef noted that local factories had to cease production due to the inability to export goods.

Forecasts related to the West Bank's GDP growth, as cited by Al Jazeera, have been halved since the escalation—from the previously expected 3 percent growth.