Israel’s economy suffered a steep decline in the last quarter of 2023, with the Gross Domestic Product (GDP) falling by 19.4 per cent, marking the first contraction in nearly two years, as reported by CNN. The economic downturn is attributed to the ongoing war with Hamas in Gaza, which has taken a heavy toll on the country’s economic activity.
According to Israel’s Central Bureau of Statistics, the sharp decline in GDP is a result of a 26.9 per cent drop in private consumption, a 67.8 per cent decrease in fixed investment by businesses, and an 18.3 per cent decline in exports. The war with Hamas has led to a significant reduction in household spending, a near-halt in residential building due to military call-ups, and a decrease in Palestinian workers, all contributing to the economic downturn.
Liam Peach, senior emerging markets economist at Capital Economics, noted that the economic recovery in the first quarter looks promising but expressed concern about the overall GDP growth for 2024, indicating that it may record one of its weakest rates on record. The Bank of Israel estimates that the conflict with Hamas could cost Israel around 255 billion shekels ($70.3 billion) by the end of 2025, which is equivalent to approximately 13 per cent of GDP.
In response to the economic challenges posed by the war, the central bank of Israel has revised down its forecast for GDP growth in 2023 to 2 per cent, from an initial estimate of 3 per cent. Additionally, Moody’s recently downgraded Israel’s credit rating for the first time, citing elevated political risk and deteriorating public finances due to the ongoing conflict.
Despite the economic setbacks, Moody’s acknowledged that Israel has managed the fallout from the conflict reasonably well, with some indicators pointing to a swift rebound over the past three months.
As the war with Hamas continues to impact Israel’s economy, policymakers and economists are closely monitoring the situation and considering potential strategies to mitigate the economic fallout while sustaining growth and stability in the long term.
