Israel's economy is facing a severe downturn due to the ongoing conflict in Gaza, which has resulted in significant fiscal deficits and a decline in credit ratings. The Central Bank of Israel has lowered its growth forecasts, anticipating a prolonged war that could exacerbate the economic situation further. Government spending has surged, primarily due to increased defense expenditures, leading to a widening fiscal deficit that reached 7.6% of GDP. This situation has caused a ripple effect across various sectors, with thousands of companies expected to close and a notable flight of startups establishing themselves abroad. The war's impact has been felt across the board, with small businesses being particularly vulnerable and struggling to survive amidst rising costs and declining demand.
The fiscal deficit in Israel has significantly increased, reaching 146 billion shekels ($39.77 billion) as of June, surpassing the government's target. This fiscal pressure is compounded by rising government spending, which has exceeded 300 billion shekels ($81.72 billion) this year alone. The Central Bank has projected a mere 1.5% growth for 2024, down from earlier estimates, reflecting the high geopolitical uncertainty stemming from the ongoing conflict. Additionally, credit rating agencies have downgraded Israel's ratings, indicating potential future challenges in debt collection and fiscal management.
The ongoing war has also led to a significant number of company closures, with estimates suggesting that 60,000 businesses may shut down this year. Many of these are small enterprises that have been disproportionately affected by the war's economic fallout. The construction sector, in particular, is facing severe labor shortages due to the conflict, further complicating recovery efforts. Moreover, the Israeli startup ecosystem is witnessing a troubling trend, with nearly half of new startups being established outside the country, reflecting a broader trend of economic activity shifting away from Israel.
- The Central Bank's decision to maintain interest rates at 4.50% for the fourth consecutive meeting underscores the cautious approach being taken amidst the ongoing conflict. The bank's focus remains on stabilizing financial markets while addressing inflation concerns. As the war continues, the economic landscape remains uncertain, with businesses grappling with supply chain disruptions and increased operational costs.
- The impact of the war on the Israeli economy is multifaceted. Companies are facing a complex reality, with many reporting declines in sales and operations due to the ongoing conflict. The agricultural and construction sectors are particularly hard-hit, experiencing severe labor shortages and increased recruitment costs. Furthermore, the geopolitical tensions have led to trade restrictions, such as Turkey's ban on trade with Israel, forcing businesses to seek more expensive alternative sources for building materials.
