Israel’s economy slumps 19.4% in the fourth quarter as war takes a toll

London
CNN
 — 

Israel’s output contracted sharply in the final three months of 2023, falling for the first time in nearly two years, as the war with Hamas takes a heavy toll on the economy.

Gross domestic product (GDP) plunged 19.4% on an annualized basis compared with the July-to-September quarter, when it grew by a revised 1.8%, Israel’s Central Bureau of Statistics said Monday in its initial estimate.

The worse-than-expected decline was driven by a 26.9% drop in private consumption, as confidence plummeted following the October 7 attacks and households cut back on spending.

Fixed investment by businesses tumbled 67.8%, “driven by a near-halt in residential building resulting from military call-ups and a reduction in Palestinian workers,” according to Liam Peach, senior emerging markets economist at Capital Economics. Exports declined 18.3.%.

“While a recovery looks set to take hold in (the first quarter), GDP growth over 2024 as a whole now looks likely to post one of its weakest rates on record,” Peach said in a note Monday.

Last year, Israel’s economy grew 2%, according to the statistics office.

The Israeli shekel weakened slightly after the data release to trade at around 3.62 to the US dollar. But the currency has staged a remarkable recovery since falling in the immediate aftermath of the October attacks, thanks partly to support from the central bank.

Israel’s stock market shrugged off the negative GDP reading. The benchmark Tel Aviv 125 Index — which comprises the 125 most valuable companies on the Tel Aviv Stock Exchange and is seen as a barometer for Israel’s economy — gained 0.6% in mid-afternoon trade.

The contraction in output is the latest piece of bad economic news for Israel, which has been waging a war in Gaza aimed at destroying Hamas.

The conflict is expected to cost Israel around 255 billion shekels ($70.3 billion) by the end of 2025, equivalent to around 13% of GDP, according to the Bank of Israel.

In November, the central bank cut its forecast for GDP growth this year to 2%, from an estimate of 3% on the eve of the war.

And earlier this month, Moody’s delivered Israel’s first ever credit rating downgrade, citing elevated political risk and deteriorating public finances stemming from the war.

Before the war broke out, Israel’s economy was on a relatively solid footing, logging growth of 6.5% in 2022. The government debt-to-GDP ratio had fallen to 61% — from 71% during the pandemic — considerably below the level in countries such as the United States and United Kingdom.

But the conflict is testing the strength of the economy and straining government finances. Year-over-year inflation slowed to 2.6% in January, from 3% in December, a possible sign of weaker economic activity.

Moody’s sees Israel’s public debt burden “materially higher than projected before the conflict,” with defense spending expected to be nearly double its level in 2022 by the end of this year.

Alongside direct spending on the war, the state is also subsidizing housing for Israelis evacuated from homes bordering Gaza and Lebanon, as well as providing financial support to workers and companies.

Israel’s workforce shrank by around 7% when the war broke out, after more than 300,000 military reservists were called up, according to the Institute for National Security Studies at Tel Aviv University.

Reservists are now starting to be released from duty and schools have also reopened, bringing the labor force closer to pre-conflict levels, according to Moody’s.

That could deliver a welcome boost to Israel’s vital tech sector, where about 15% of the workforce had been enlisted for the war, according to Startup Nation Central, a non-profit that promotes Israel’s tech industry globally.

The tech industry accounts for 18% of Israel’s GDP, about half the country’s exports and 30% of tax revenue, making its prosperity crucial to Israel’s economy.

Fundraising had already taken a knock before the war…