Israel is known for being one of the booming and fast-growing economies in the industrialized world. However, Israel’s economy finds itself embroiled in a multifaceted crisis, marked by a mix of political instability, social unrest, and global economic pressures. The economy has experienced a steep decline in its trajectory, particularly evident from the last quarter of 2023 to the present.
The nearly 11-month-long war with Hamas has inflicted profound damage to the economy, as the leaders, mainly Prime Minister Benjamin Netanyahu, prolonged the siege in Gaza with no indications of seeking a ceasefire. The ongoing Gaza conflict threatens to escalate into an even bigger confrontation that would spell a disaster for Israel’s already crippling economy.
The country’s credit rating has dropped, the tourism industry has collapsed, the deficit is surging, and public spending is mired in controversy. The economy has been severely hit due to the expenditures of restoring the north and south of the country, compensating victim families’ and bolstering Israel’s defenses.
Economic Indicators Reflecting the Downturn
Israel’s new economic data from the Central Bureau of Statistics had bad news for the country. The economy grew at just 1.2% in the second quarter, falling short of forecasts. According to the preliminary data, the growth rate was below the expected range of 2.3 to 5%. Compared to the same quarter last year, Israel’s GDP (gross domestic product) declined by 1.4%. The figures show that the GDP per capita fell by 0.4%, showing the significant impact of the ongoing war with Gaza.
Conflict with Hamas, which began on October 7, 2023, sharply curtailed economic activity. Business production dropped by 1.9% and exports of goods and services fell by 8.3%. Meanwhile, the investments in fixed assets saw a marginal increase of 1.1%, reflecting incapacitated capital investments. Private consumption declined by 0.7% in 2023, following a significant 7.4% increase in 2022. The import of goods and services dropped by 6.9% in 2023, after a 12% growth in the previous year.
Additionally, exports of goods and services decreased by 1.1% in 2023, compared to an 8.6% increase in 2022. The Israeli central bank reported that the country’s foreign exchange reserves dropped by $5.632 billion throughout March and April, reflecting a downward trend in Israeli economic performance. These reserves currently total $208.109 billion, with the decrease mainly attributed to a re-evaluation of Israeli foreign assets, which amounted to $3.895 billion. Additionally, the government’s foreign asset transactions resulted in a net deficit of $1.703 billion.
On August 12, 2024, Fitch Ratings downgraded Israel’s credit rating score from A+ to A. The credit rating agency also kept the outlook negative with an indication that the economy is likely to continue declining in the future. According to Fitch’s key rating drivers, the ongoing war on Gaza heightened geopolitical risks, and persistent spending on military operations will further threaten the shrinking economy of Israel.
Similarly, earlier this year, the downgrades by S&P Global and Moody’s Ratings were a reflection of growing uncertainty about Israel’s economic stability amidst mounting geopolitical tensions. S&P Global Rating reduced Israel’s long-term sovereign credit ratings from AA- to A+ while Moody’s downgraded credit score from A1 to A2 that too with a negative outlook, which signaled a significant loss of confidence in Israel’s economic future.
Escalating Military Expenditures Due to Regional Tensions
On October 7, 2023, Hamas launched a devastating attack on southern Israel, which killed nearly 1,200 people and abducted 250 more. This attack marked the beginning of a conflict that continues to this day. In response, the Israeli military intensified its operations in Gaza, in which it took control of the Gaza-Egypt border strip and launched a full-scale incursion with heavy bombardment in the city of Rafah.
Israel’s military campaign is prolonged for political purposes and has heightened the risks of continued intensive operations. This has placed an immense strain on the country’s public spending, with substantial expenditures on military needs and disruptions in border areas. The constant prioritization of military needs to address regional tensions has severely imbalanced the spending on the tourism and construction sectors as well.
According to estimates from the Bank of Israel, the anticipated cost of conflict in 2023–2025 could exceed $55.6 billion. These costs include funding the armed forces, acquiring weapons and other military equipment, training soldiers, providing logistical support, and settling for the more than 28,000 mercenary army personnel, each of whom is costing the state about 13,000 euros a month. Due to the enormous military spending, these expenditures would put significant pressure on the state’s general budget. A combination of budget cuts and increased borrowing is likely to be employed to cover these financial shortfalls.
Moreover, the tensions remain high between Iran and Israel. The decades-long conflict between the two states abruptly escalated from indirect hostilities to confrontation on April 13–14, when Tehran launched an attack on Israel, followed by Israel’s retaliatory strike on Isfahan on April 19. Following an Israeli drone strike, Hezbollah is believed to have launched a missile attack that killed twelve civilians in Golan Heights on July 27.
Additionally, on July 30th, Israel targeted a Houthi-controlled port in Yemen and eliminated a Hezbollah commander in Beirut. Israel is also suspected of being involved in the assassination of Hamas leader Ismail Haniyeh in Iran on July 31st. These incidents highlight the high level of tensions in the region and the risk of escalation that could further damage Israel’s credit ratings.
Disruption of Economic Activity
The financial implications of the ongoing war on Gaza would continue to haunt the economy in the light of given military expenditure, reconstruction, and daily economic losses. According to the Israeli Central Bureau of Statistics, 360,000 reservists were called up to join the army service, leaving behind their workplaces and businesses—many of whom worked in the high-tech sectors of banking, AI, medicine, and agriculture in large numbers.
Businesses have suffered significantly, trade and supply networks have been disrupted, and investments have dropped by more than 63%. This resulted in a reduction in economic activity, a decline in investments, and severe disruption in the job market. Moreover, due to a lack of security and safety, the biggest chunks of capital, i.e., investment, trade, banks, and the stock market, were negatively impacted by the ongoing intensive military operations.
The report stated that exports plummeted by 18% and imports of goods and services dropped by 42%. A massive economic and diplomatic setback for Israel ensued when Turkey announced to halt all import and export activities until a permanent Gaza ceasefire. Both counties claimed to have a trade volume of $6.2bn in 2023.
The tourism sector in Israel, one of the most sensitive industries, has been severely impacted by the ongoing conflict. Overall tourism in the region has seen a sharp decline due to heightened security tensions and widespread travel warnings. The number of tourists reduced from about 300,000 in September to approximately 89,000 in October and then dropped to approximately 38,000 in November, according to data from Israel’s Central Bureau of Statistics.
Bank Hapoalim said in a research report that the primary factor delaying the recovery of economic activity is the slowdown in the construction industry, which is heavily impacted by the absence of Palestinian workers. This is compounded by reduced economic activity in the tourism and agriculture sectors in the northern regions and southern communities near Gaza.
Palestinian workers remained crucial to the construction industry but when the war broke out, they vanished almost overnight as Israel imposed an immediate ban on workers from Gaza and severely restricted access for most workers from the West Bank. Additionally, thousands of foreign workers from countries like China, Thailand, and the Philippines returned to their homes during the initial shock of the attack, which caused the economy to come to a standstill.
Meanwhile, amid the ongoing conflict, around 200,000 Israelis have been evacuated from their homes in the devastated south and the threatened north. They are facing prolonged uncertainty as reconstruction efforts slowly begin to take shape.
Conclusion
Israel’s economy is facing an impending doom aggravated by ongoing geopolitical tensions, military conflicts, and rising economic disruptions due to the heightened military expenditures. A grim picture of the country’s financial future is drawn by the downgrades in Israel’s credit scores by major rating agencies, alongside declining private consumption, stalled construction, and disrupted activity in productive sectors such as tourism and agriculture.
The war took a toll on the economy, which was estimated to cost hundreds of billions of shekels, along with the exodus of foreign and Palestinian workers. As Israel navigates with the short- and long-term impacts of these crises, the road to economic recovery appears uncertain and fraught with challenges.
If you want to submit your articles and/or research papers, please check the Submissions page.
The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
