Israel’s economy falls 19.4% in fourth-quarter as Gaza war takes its toll

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Israel’s economy contracted by an annualised 19.4 per cent in the fourth quarter as the war in Gaza rages on, the country's Central Bureau of Statistics said on Monday.

Overall, its economy grew 2 per cent for the whole of 2023, compared to 6.5 per cent in the previous year.

“The contraction of the economy in the fourth quarter of 2023 was directly affected by the outbreak of the Iron Swords War on October 7,” the statistics agency said in an initial estimate on Monday.

The war in Gaza, which began when Hamas attacked southern Israel, killing about 1,200 people and taking about 240 hostages, has turned into a humanitarian crisis.

More than 29,000 Palestinians have been killed, with 85 per cent of the enclave's 2.3 million people displaced, and the country's economy has collapsed.

Israel's economy has also been hit hard, with Moody’s Investors Service downgrading the country's credit rating this month due to the war.

The country, which had a credit rating of A1, was downgraded to A2 with a negative outlook, the ratings agency said.

“The main driver for the downgrade of Israel's rating is Moody's assessment that the continuing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future,” it said.

In the coming years, Israel's budget deficit will be significantly larger than expected before the conflict, Moody’s said.

"This downgrade [in GDP] reflects our view that the war will continue to hit the economy in 2024, through weak travel and tourism, slower private consumption growth and extended delays to fixed investment,” Elliot Garside, economist (Israel) at Oxford Economics, told The National.

“We think that the peak impacts of the war are over and expect the recovery to slowly begin over the next few quarters, with tourist arrivals remaining below prewar levels for the duration of 2024.”

The “larger-than-expected” GDP contraction in the fourth quarter “highlights the degree to which the Israeli economy has been affected by the conflict, particularly on the private activity side”, Goldman Sachs said in a report.

“That said, we view this release as mostly backward-looking, as high-frequency indicators [such as] Bank of Israel’s State of the Economy Index, our Current Activity Indicator and credit card activity data are showing signs that activity has recovered materially from the initial shock,” said Tadas Gedminas, economic research analyst at Goldman Sachs.

The GDP release also raises the likelihood that the Bank of Israel will deliver further near-term rate cuts, he added.

Israel’s central bank chief said this month that the government must take action to tackle the economic challenges raised by Moody's.

“In order to strengthen the trust of the markets and of the ratings agencies in the Israeli economy, it is important that the government and the Knesset act to deal with the economic issues raised in the report,” Bank of Israel governor Amir Yaron said this month.

In October, S&P lowered Israel’s credit outlook to negative, from stable, citing the risk that the conflict could broaden, with a more pronounced effect on the country's economy.

Last month, the Bank of Israel cut interest rates by 0.25 basis points, marking the first reduction since April 2020, as part of efforts to stabilise the markets, support the economy and “reduce uncertainty” amid the Gaza war.

The Bank of Israel estimates the cost of the conflict for the years 2023-2025 to stand at about 255 billion shekels ($64.4 billion) or 13 per cent of the 2024 forecast GDP, which includes both higher defence and civilian spending as well as lower tax revenue.

Last year's budget deficit was raised from less than 2 per cent to 4.2 per cent of GDP in the supplementary budget approved in mid-December. The revised budget for this year sets a deficit of 6.6 per cent of GDP, compared with a pre-conflict forecast of about 2.5 per cent.