Bank of Israel downgrades economic growth outlook as Gaza war continues

Bank of Israel on Monday downgraded the country’s growth outlook from its April estimates because of the impact of the war in Gaza , with a “long way to go” before its economy can resume normality. The Israeli economy is now expected to grow by 1.5 per cent in 2024 and by 4.2 per cent in 2025, with the central bank's projections cumulatively 1.3 percentage points lower than the April forecast. The sluggish pace of growth assumes that the war’s direct impact on the economy will continue until the beginning of 2025, Bank of Israel said. “The geopolitical uncertainty has increased, and the economy’s risk premium has risen. The war has considerable economic ramifications, which impact on Israel’s economy … there is still a very long way to go before fully returning to normal activity,” said Amir Yaron, Governor of Bank of Israel. The overall level of economic activity is still lower than what prevailed just before the war, he said. The war in Gaza began when Hamas attacked southern Israel on October 7, killing about 1,200 people and taking about 240 hostages. Israel's retaliation has continued since then, with more than 38,000 Palestinians killed, 85 per cent of the enclave's 2.3 million people displaced, and Palestine's economy ravaged. Bank of Israel said its latest estimate underscores “more prolonged fighting, and at a greater intensity”, a high level of uncertainty and an increased likelihood of more severe security scenarios. To maintain the economic stability, Bank of Israel on Monday kept the interest rate unchanged at 4.5 per cent, but said it is expected to cut the rate to 4.25 per cent in the first quarter of next year. “ Due to the revised assumption regarding the duration of the fighting, our assessment is that the risk premium, which rose due to the war, will decline more gradually than we assumed in April, so that a higher interest rate will be necessary in order to stabilise inflation,” Mr Yaron said. The government budget deficit is expected to be 6.6 per cent of the gross domestic product in 2024, Bank of Israel said. If fiscal adjustments of a permanent nature totalling 30 billion shekels ($8.2 billion) will be made by the government, the deficit in 2025 is expected to decline to about 4 per cent of the GDP. Meanwhile, the growth rate of private consumption in Israel, which recovered in the first quarter of the year, also moderated during the June quarter, as reflected in credit card expenditure data, Mr Yaron said. Bank of Israel noted that the inflation rate in the coming four quarters (ending in the second quarter of next year) is expected to be 3.2 per cent. It is partly due to the impact of the taxation measures that the bank assumed will be approved in the coming year. Inflation in 2024 is expected to be 3 per cent, compared with 2.7 per cent in the April forecast, and 2.8 per cent in 2025, compared with 2.3 per cent in the previous estimates. “Inflation is a process that negatively impacts the economy and growth, and makes financial conduct difficult for the economy overall, and particularly for weaker population groups … therefore, we continue to adopt monetary policy that supports the moderation of inflation,” Mr Yaron said. As long as the fighting lasts, Israel’s GDP growth is expected to be impaired both on the supply and demand sides, Bank of Israel said. Mr Yaron said that Israeli economy is facing very “high uncertainty” and is in a complex period “in which significant processes are occurring”. “Some of them indicate recovery and point to a return to solid economic activity, while others show the continued challenges weighing on the ongoing functioning of the economy.” In its previous estimates, the Bank of Israel estimated the cost of the conflict for the years 2023 to 2025 to stand at about 255 billion shekels or 13 per cent of the 2024 forecast GDP, which includes both higher defence and civilian spending, as well as lower tax revenue.

Bank of Israel downgrades economic growth outlook as Gaza war continues

Central bank expects direct economic impact of the war to continue until the beginning of 2025