With some 300,000 citizens displaced from their homes, a large proportion of the workforce called up for military service, tourism slowed, agriculture in border areas brought to a halt, and massive government expenditures on the war effort, the Jewish state is under considerable economic strain. Alex Brummer reports that, nonetheless, it appears able to whether the storm:

After an initial currency collapse at the start of the conflagration, the shekel has bounced back strongly. It is now worth 3 percent more against the dollar than on October 7. Blessed with strong foreign-exchange reserves, the Bank of Israel was able to come to the rescue with a large-scale intervention in the foreign-exchange markets.

In Israel, the collapse in total output or GDP in the final quarter of the year is estimated to have been 19 percent. In spite of this, there is no current forecast of recession in 2023 with the economy still expected to expand in 2024.

There will be severe economic costs for Israeli citizens and taxes may eventually have to rise to pay for the war. . . . But as investment bankers Goldman Sachs note: “Israel’s economic and financial vulnerabilities are much lower today than compared to other major episodes of escalating violence.”

The country is protected by its strong currency reserves, reduced dependence on inflows of foreign currency and robust underlying growth. The rebound in the value of the shekel means that when the conflict eases the Bank of Israel has scope to reduce interest rates. Past prudence in managing Israel’s economy mean that stability is not threatened. A rapid recovery of lost wartime output—once the guns are silenced—is eminently possible.​

Below, today’s newsletter will return to some other reflections on the one-year anniversary of the outbreak of the current war, but first something must be said of its recent progress. Israel has kept up its aerial and ground assault on Hizballah, and may have already killed the successor to Hassan Nasrallah, the longtime leader it eliminated less than two weeks ago. Matthew Levitt assesses the current state of the Lebanon-based terrorist group, which, in his view, is now “a shadow of its former self.” Indeed, he adds,

it is no exaggeration to say that the Hizballah of two weeks ago no longer exists. And since Hizballah was the backbone of Iran’s network of militant proxies, its so-called axis of resistance, Iran’s strategy of arming and deploying proxy groups throughout the region is suddenly at risk as well.

Hizballah’s attacks put increasing pressure on Israel, as intended, only that pressure did not lead Israelis to stop targeting Hamas so much as it chipped away at Israel’s fears about the cost of military action to address the military threats posed by Hizballah.

At the same time, Levitt explains, Hizballah still poses a serious threat, as it demonstrated last night when its missiles struck Haifa and Tiberias, injuring at least two people:

Hizballah still maintains an arsenal of rockets and a cadre of several thousand fighters. It will continue to pose potent military threats for Israel, Lebanon, and the wider region.

How will the group seek to avenge Nasrallah’s death amid these military setbacks? Hizballah is likely to resort to acts of international terrorism, which are overseen by one of the few elements of the group that has not yet lost key leaders.

But the true measure of whether the group will be able to reconstitute itself, even over many years, is whether Iran can restock Hizballah’s sophisticated arsenal. Tehran’s network of proxy groups—from Hizballah to Hamas to the Houthis—is only as dangerous as it is today because of Iran’s provision of weapons and money. Whatever Hizballah does next, Western governments must prioritize cutting off Tehran’s ability to arm and fund its proxies.