Last week, this newsletter took a look at some of the Israeli economy’s surprising signs of strength, including a growing tech sector attracting foreign investment, and a major source of offshore natural gas about to be exploited. Naomi Feldman takes a more comprehensive look at the country’s economic and fiscal health:

The first quarter of 2024 saw the economy bounce back to a large extent after the shock of October 7, 2023. But recent indicators now suggest a slowdown in economic growth during the second quarter of 2024 and beyond.

Wars are expensive. Given the government’s rising revenue demands, it has turned to its two main revenue-raising tools: selling bonds (debt) and taxation. The ongoing geopolitical uncertainty contributes to Israel’s currently high risk premium, meaning that investors require a higher rate of return for investing in Israeli bonds, which raises borrowing costs and potentially further impacting economic growth and stability moving forward.

Israel has been in similar situations in the past and has taken the necessary economic steps to right the fiscal path. By leveraging its experience and resilience, there is hope that the country can navigate these challenges and emerge stronger, with renewed opportunities for growth and economic prosperity.

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.