Israel faces economic slowdown amid prolonged Gaza War

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The State of Israel is experiencing an economic slowdown after more than 10 months of war in Gaza against the Hamas terrorist organization. According to recent preliminary data released by the Israeli Central Bureau of Statistics, Israel’s Gross Domestic Product (GDP) grew by an annualized 1.2% during the second quarter of 2024, between April and June. The modest 1.2% growth is well below the projected growth range of 2.3% to 5% that Israeli economic officials expected.

This figure represents a slowdown of 0.2% compared to the first quarter, from January to March when the economy expanded with an annualized 1.4%. Furthermore, the latest GDP growth figure is 1.4% lower than the corresponding quarter in 2023, several months before the war in Gaza began.

On a per capita basis, the Israeli economy contracted by 0.4% during the second quarter due to a population growth of approximately 1.6%.

Ronen Menachem, chief markets economist at the Israeli Bank Mizrahi-Tefahot, believes the disappointing growth figure indicates serious damage to the Israeli economy amid the ongoing conflict with the Iranian-backed terrorist organizations Hamas in Gaza and Hezbollah in Lebanon.

“Gross domestic product per capita shrank both compared to the previous quarter and compared to the corresponding quarter last year, a figure that clearly indicates the significant damage that the ongoing war is causing to the economy,” Menachem assessed.

The Israeli economy experienced a 20.6% contraction during the fourth quarter of 2023, following the Oct. 7 Hamas attack.

The normally robust Israeli economy bounced back at the beginning of 2024 with an annualized growth of 17.3%. However, the latest low growth figure indicates that the Israeli economy is currently far from recovering.

Jonathan Katz, chief economist at Leader Capital Markets, attributed the slow economic growth to a slowdown in exports and investments in the second quarter.

“GDP growth disappoints in the second quarter due to a contraction in exports (goods and services) and weak investments,” Katz said. “The closure of businesses in the north and south (agricultural, commerce) is also impinging on growth.”

Bank of Israel Governor Amir Yaron announced in June that the war in Gaza would cost the Israeli economy around $67 billion between 2023 and 2025, making it by far the most expensive war in modern Israeli history.

The slowdown in the Israeli economy has also impacted its international credit ratings.

Fitch Ratings recently downgraded Israel’s credit rating from A+ due to the ongoing Gaza War and the risks of a regional war with the Iranian regime and its terror proxies in the Middle East.

“The downgrade to 'A' reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks, and military operations on multiple fronts. Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel's credit profile,” the report stated.

Fitch’s negative forecast for the Israeli economy indicates that it is potentially considering more downgrades unless the Israeli economy stabilizes.

Senior Israeli officials fear Moody's international rating agency will also downgrade Israel's credit rating for a second time. The first downgrade happened last year amid concerns about the Netanyahu government’s controversial judicial reforms.

"Unfortunately, I’m under the impression the company's credit downgrade is only a matter of time," a senior economic official told the Ynet news outlet on Monday. "I was, sadly, right at the time, and I'm afraid the same will happen now," the official predicted.