Israel faces uncertain economic future after six months of war

Six months since the start of Israel’s war on Gaza, projections regarding Israel’s economy seem set to remain largely negative.

Al Jazeera reported that the country suffered $56bn worth of direct losses due to the war, which came about as a result of spending on army operations in Gaza and compensation to its citizens and soldiers affected by the conflict.

The country’s economy shrunk by 19.4 percent in the last three months of 2023 compared to the same period in 2022 according to Israel’s Central Bureau of Statistics – the sharpest drop since the Covid-19 pandemic.

A 26.9 percent drop in private consumption was a major driver in the contraction, as business investments also plunged by 67 percent.

Around 200,000 Israelis remain displaced from their homes in the north and south of the country, as areas around the Gaza Strip remain evacuated and daily clashes with Lebanon’s Hezbollah persist in the north.

Additionally, with over 300,000 Israeli reservists called for duty, and Palestinian workers locked out of Israel since the war began, the workforce has suffered significant losses.

Overall exports also dropped by 18.3 percent. Despite a 58 percent drop in investment in tech companies, the sector Israel is most famed for has remained largely afloat.

“In contrast to other sectors, geopolitical tensions increase interest and investment in cyber companies,” Amir Rapaport, founder of cyber company Cybertech Global, told Reuters. “Therefore, we expect to see more investments in Israeli cyber companies and new start-ups that address emerging threats.”

Negative outlook ahead

Credit rating agency Fitch forecast a budget deficit of 6.8 percent and says debt-to-GDP is expected to rise by 65.7 percent.

An Israeli non-profit reported in a survey conducted in November that roughly 20 percent of the Israeli public said their income was hit by a “large” or “very large” extent since the beginning of the war.

Additionally, Al Jazeera reported that the construction sector is seeing weekly losses of $650m, while real estate sales are reportedly the worst they have been in 30 years.

In February, financial rating agency Moody’s downgraded Israel’s credit rating from A1 to A2. It said that the impacts of ongoing war in Gaza, which has now killed over 33,000 Palestinians, had raised political risks and weakened Israel’s institutions and its fiscal strength.

The agency also kept its negative outlook, meaning that a further downgrade is possible.

Fitch also kept its negative outlook on Israel’s economy, citing the continuation of the war as a reason.

“We expect a near-term jump in debt/GDP and persistently higher military spending in the context of fractious domestic politics and uncertain macroeconomic prospects, which could limit Israel’s ability to bring down debt in the future,” the agency said.