Gaza War's Impact on Israel's Economy
The ongoing war in the Gaza Strip, now in its 13th month, continues to exert significant pressure on Israel's economy. Recent data from the Central Bureau of Statistics reveals that Israel's gross domestic product (GDP) experienced a mere 0.3% increase year-on-year during the second quarter of 2024, a decline from 0.7% growth in the previous month and 1.2% in August. The economy has been buoyed by consumer and government spending, as well as fixed asset investment, yet exports have seen a downturn.
In light of these developments, the Bank of Israel has revised its growth forecast for 2024 down to 0.5%, a significant drop from the earlier estimate of 1.5%. The nation is also grappling with high inflation rates, prompting central bank officials to contemplate potential interest rate hikes, although rates have remained unchanged for the past six meetings. The first quarter of 2024 saw a recovery with a GDP growth of 17.2%, rebounding from a sharp contraction of 4.8% in the fourth quarter of 2023, which marked the onset of the conflict.
Rising Budget Deficit Amidst Military Spending
The financial strain from the ongoing conflict has led to a sharp increase in Israel's budget deficit, which reached 8.8 billion shekels ($2.34 billion) in September alone. This figure represents a rise to 8.5% of GDP over the past 12 months, up from 8.3% in August, and surpasses the government's target of 6.6% for the entirety of 2024. The deficit has steadily increased for six consecutive months, primarily driven by higher military and civilian expenditures linked to the war.
Spending related to the conflict, which escalated on October 7, 2023, has exceeded 103 billion shekels ($27.35 billion). In a troubling sign for investors, Standard & Poor's recently downgraded Israel's long-term credit rating from A+ to A, citing heightened security risks associated with the ongoing conflict, particularly in relation to Hezbollah in Lebanon and the potential for a direct confrontation with Iran. Moody's also downgraded Israel's credit rating, warning of a potential shift to 'junk' status if tensions escalate further. The agency anticipates zero growth for Israel's economy this year and a budget deficit of 9%, reflecting the severe economic implications of the ongoing conflict.
