With the war in Gaza intensifying and little to no sign of a ceasefire, Israel’s economy and businesses are bracing for further strain.

Over almost two years of fighting, repeated army call ups have forced business leaders like Nimrod Vax to make do with fewer workers. At one point, he says, 20% of the 600 employees at his tech company — a quarter of them based in Israel — were serving in the military.

“There’s been a noticeable impact on our long-term projects and on research and development,” the co-founder of data-intelligence company BigID said. “Key talents were away.”

Vax is one of many Israeli entrepreneurs who have built lucrative businesses in the past decade and are now facing uncertainty as employees are drafted into the military. As many as 130,000 reserve soldiers are expected to be mobilized for Israel’s latest offensive in Gaza, tying up some 3% of the nation’s workforce.

Israel is preparing for a long war, endangering the lives of hundreds of thousands of Palestinians, many of whom have faced displacement several times over. The recent push to take over Gaza’s de facto capital has worsened the backlash over the humanitarian crisis in the territory, where a United-Nations-backed monitor recently declared a famine.

Next week, France and Saudi Arabia are set to spearhead a push for more nations to recognize a Palestinian state and the European Union — Israel’s biggest trade partner — has proposed suspending the Jewish state’s preferential commerce treatment.

Investors are increasingly concerned about the impact of protracted fighting. The escalating threat of sanctions and a stalling economy have snapped Israeli stocks’ war-time resilience, driving the main Tel Aviv index into a steep decline.

Equities slumped earlier this week when Prime Minister Benjamin Netanyahu said Israel will need to be more self-sufficient as the war isolates the country. He later walked back the comments, saying he was specifically referring to security independence and was misunderstood in a way that “allegedly rattled markets.”

Exporters, which include the nation’s all-important tech sector, worry about Israel becoming a pariah as images of the destruction in Gaza spark outrage globally. Some European customers are asking Israeli defense firms to keep talks about future orders under wraps, Bloomberg reported last week.

Netanyahu says the attack on Gaza City is needed to force Hamas, designated a terrorist organization by the U.S. and many others, to relinquish its arms and return the Israeli hostages it still holds. The Iran-backed militant group killed 1,200 people and took 250 hostage with its October 2023 assault on Israel.

For small and medium-sized companies, which employ about 60% of Israel’s workforce, labor shortages have been particularly taxing. Unlike large-scale companies — which can more easily accommodate the lack of a few employees — repeated, and sometimes lengthy, leaves pose an existential risk.

“If you’re a small business a few absences can imminently shut you down,” Ron Tomer, president of Manufacturers Association of Israel, said.

Israel’s $580 billion economy grew last year at the slowest pace in over two decades — barring the COVID-19 pandemic — and output remains smaller than pre-war levels when adjusted for inflation. The government’s budget deficit has soared and it borrowed a record amount last year on local and international bond markets to help finance the conflict.

“Israel’s economy is 7% smaller than it would have been without the war, a blow on par with the U.S. during the global financial crisis,” Bloomberg Economics’ Ziad Daoud said. “The gap may persist, with temporary shocks possibly hardening into permanent scars.”

Companies are now feeling the pinch from army drafts, but a new set of challenges may arise for the Israeli economy once the war ends and thousands of reservists return to the labor market.

“An underlying crisis may erupt once masses are released from the military,” BDO Consulting’s chief economist in Israel, Chen Herzog, said. “Whether the economy can absorb them back depends a lot on how the war ends and government policy.”

The war has decimated the Palestinian economy, with the World Bank saying it was experiencing “its deepest contraction in over a generation.” More than 65,000 Palestinians have died since the start of the conflict, according to the Hamas-run health ministry.

By the end of last year, 5% of Israel’s self-employed reservists who had been called up for over 30 days were forced to shut down their businesses, data from Israel’s social security system show. Even those who persevered have taken a hit.

That was the case with Yaniv Ptaya, a practitioner of Chinese medicine who was called into the army on three occasions since October 2023. In total, he’s been away from work for the equivalent of more than six months and eventually had to close down one of his two clinics.

The government covers reservists’ salaries but not their full employment expenses, which include social benefits costing as much as 30% of a worker’s salary. Plus, there are overtime payments to those filling in for the absentees.

“These added costs eventually trickle down to the economy,” Tomer said.

Reserve duty in Israel is mandatory and, even though the number of so-called draft dodgers has increased since the start of the war, most comply. The Israel Defense Forces said in May that 75% of those called had shown up, while some media reports suggest a lower turnout of around 60% to 70%.

For Or Epstein, the co-founder of defense-tech company Wonder Robotics, the war has meant covering night shifts in his military unit — which provides support to combat troops in Gaza — and heading to work after just a few hours’ sleep.

The shortened rest he can handle, but switching from military duty to everyday business is mentally challenging, Epstein said. Plus, he adds, it only works because his business partner, who isn’t in the reserves, has taken on more responsibility at the company, which develops solutions to help drones fly autonomously.

Epstein accumulated 500 days of reserve duty in the past two years and another tour may be on the cards.

“I’ll report,” he said, “because of my sense of duty, but also because I’ve learned to combine both.”

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