Israel’s economy to ...
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Since the deadly retaliatory attacks by Hamas on October 7, the Israeli stock market and currency values have gradually declined and remain unstable. The damage to Israel’s IT sector alone is estimated to be around $45 billion, yet concerns about the national economy persist. Earlier this year, Moody’s and S&P also downgraded Israel’s credit rating. The consumption of goods, trade, and investment in Israel are all on a downward trend, a significant setback for the Israeli regime, with effects likely to be felt over the next 10 to 12 years unless Israel recognizes Palestinian rights and fosters a climate of peace.
Fitch has separately warned Israel to reduce the level of escalating tensions with Iran, as additional military expenses could be catastrophic for its already shaky economy. The Bank of Israel has estimated that the daily wartime expenditures for 2023-2025 could reach $55 billion. These funds will likely be secured through a combination of increased borrowing and budget cuts, which means that military actions are exerting pressure on the economy. On Sunday, Israel’s Central Bureau of Statistics estimated that the first half of 2024 will see a 2.5% annual growth rate, down from 4.5% during the same period last year. Before the war began, Israel’s economy was predicted to grow by 3.5% last year, but it ended up growing by only 2%. Other sectors of the economy have taken a significant hit. In the last quarter of last year and in the weeks following the start of the war, Israel’s overall GDP declined by 20.7% on an annual basis. This downturn was due to a 27% decrease in private consumption, a drop in exports, and reduced business investments. At the beginning of the year, household expenses dropped by nearly 50%, as Israeli citizens curtailed their spending to cope with future uncertainties, resulting in reduced industrial production.
The war has also led to a massive increase in public expenditure. According to Elliot Garstide, a Middle East analyst at Oxford Economics, military spending in the last three months of 2023 rose by 93% compared to the same period in 2022. Garstide further noted that monthly figures for 2024 indicate that military spending has nearly doubled compared to the previous year. Most of this increase will be allocated to reservist wages, artillery, and interceptors for Israel’s Iron Dome defense system. Israel has also received approximately $14.5 billion in additional funding from the United States this year, exceeding the $3 billion annual aid typically provided by the US. According to Garstide’s study, there have not yet been significant cuts in other budget areas, such as healthcare and education, although it is likely that increased conflict will lead to cuts in these areas as well. Oxford Economics has estimated that if a new front with Iran does not open, Israel’s economy will grow by 1.5% this year. However, due to slow growth and high deficits, further pressure will be placed on Israel’s debt profile, potentially leading to increased borrowing costs and reduced investor confidence.