Israel’s economy continues to bleed even as the tenth month of the aggression on the Gaza Strip passes, with expectations of a bleaker performance due to the expansion of the conflict to the fronts of Iran, Lebanon and Yemen.
The Israeli economy is suffering from continuous losses due to its ongoing war on the Gaza Strip, which has led to an increase in public spending, a decline in the credit rating, the suffering of companies, and damage to various economic sectors. These are the most prominent losses on the macro and microeconomic levels:
Israel’s fiscal deficit widened in June to 7.6% of gross domestic product over the previous 12 months, or NIS 146 billion ($39.77 billion), up from 7.2% in May, Finance Ministry Accountant General Yali Rotenberg said, according to the Israeli newspaper Globes this month.
This brings the deficit to 1% above the government’s target of 6.6% for the end of the current year.
During last July alone, the financial deficit reached 14.6 billion shekels ($4 billion), compared to 6.4 billion shekels ($1.74 billion) in June 2023.
Since the beginning of 2024, the fiscal deficit has reached NIS 62.3 billion ($17 billion), compared to a surplus of NIS 6.6 billion ($1.8 billion) in the first six months of 2023.
Government spending
Government spending since the beginning of the year has risen above NIS 300 billion ($81.72 billion), an increase of 34.2% compared to the same period last year.
The main increase in the deficit is due to increased spending on defense and civilian ministries due to the war. Even excluding war expenses, the increase in government spending is about 9.3%, compared to a rise of only 3.3% in state revenues, which since the beginning of the year amounted to about 238 billion shekels ($64.83 billion), compared to 230.4 billion shekels ($62.76 billion) in the first half of 2023.
The Ministry of Finance expects the deficit to peak by next September before declining.
Growth forecast
The Bank of Israel (the central bank) lowered its growth forecast for the economy with a “high level” of geopolitical uncertainty, amid expectations of a prolonged and more severe war with the Palestinian resistance, and an increased risk of escalation with Hezbollah on the northern border.
The Governor of the Bank of Israel, Amir Yaron, said in a press conference in occupied Jerusalem this August that the bank “assumes that the war will continue with higher intensity until the end of 2024 and will end at the beginning of 2025.”
The bank expected the economy to grow by 1.5% in 2024, down from previous expectations in April that indicated 2%, and it also lowered its growth forecast for next year to 4.2% from 5% that was expected.
Credit rating
Standard & Poor’s rates Israel at “A+” after downgrading it from “AA-“, while Moody’s rates it at “A2”, which is equivalent to “A” on the Standard & Poor’s scale, while the third rating agency, Fitch, gives Israel a rating of “A+”.
The Israeli Finance Ministry’s budget commissioner, Yogev Gradus, recently warned Finance Minister Bezalel Smotrich against repeatedly postponing discussions on the 2025 budget, noting that it could lead to a downgrade of Israel’s credit rating, which would increase the cost of raising debt and put more pressure on the budget in the coming years.
According to the official schedule, the next round of credit rating announcements for Israel from Moody’s and Standard & Poor’s will be in November.
Benefit
The Bank of Israel kept interest rates unchanged at 4.50% for the fourth consecutive meeting this month, maintaining its cautious policy due to the war.
The bank cut interest rates by 25 basis points in January after inflation fell and economic growth was hit by the war, but it kept policy unchanged after that, Reuters reported.
The Central Bank said that due to the ongoing war, the focus remains on stabilizing markets and reducing uncertainty, in addition to stabilizing prices and supporting economic activity.
“The path of the interest rate will be determined by how close inflation is to its target, and the continued stability of financial markets, economic activity and fiscal policy,” he added.
Companies
Some 60,000 businesses are expected to close this year, the Times of Israel reported, citing business information firm Covis BDI.
The forecast came nine months after the outbreak of Israel’s war on the Gaza Strip, as tens of thousands of companies were affected by rising interest and financing costs, a shortage of manpower, a sharp decline in business volume and operations, disruption of logistics and supplies, and insufficient government assistance, according to the newspaper.
By comparison, a record 76,000 businesses were forced to close during the COVID-19 pandemic in 2020, while about 40,000 businesses typically close annually.
“No sector of the economy is immune to the repercussions of the ongoing war,” Yoel Amir, CEO of Covis PDI, told The Times of Israel. “Companies are dealing with a very complex reality: fear of escalation of the war combined with uncertainty about when the fighting will end and ongoing challenges such as staff shortages, falling demand, growing financing needs, increased procurement costs and logistical issues.”
About 77% of the businesses that have been forced to close since the start of the war – which represents about 35,000 establishments – are small companies with up to five employees, and they are the most vulnerable in the economy, as they have more urgent financing needs at a time when their operations have been severely damaged, and they find it difficult to raise money, according to Amir.
The money raised by Israeli companies fell at the beginning of 2023, when the economy was suffering from a global downturn and political uncertainty at home due to Prime Minister Benjamin Netanyahu’s proposed judicial reform, and then came the war on Gaza.
It is noteworthy that the war on Gaza caused thousands of business owners to face the sudden and continuous call-up of hundreds of thousands of employees to reserve service to join the fighting in Gaza, and 250,000 Israelis were displaced from their homes.
In a survey of 550 companies in a variety of sectors of the Israeli economy, Cofis PDI asked how badly the war had damaged their businesses, and 56% of the sample reported that their sales had declined.
In the previous poll conducted in January 2024, about 64% reported that they had suffered a decline due to the war.
Many construction sites in Israel have been closed after 85,000 Palestinian workers were prevented from working there since the beginning of the war due to security concerns, while many foreign workers who work on these sites have left.
“Agriculture – especially the construction industry – is suffering from a severe shortage of manpower, causing significant delays in projects and apartment deliveries,” the newspaper quoted Amir as saying. “We are seeing an influx of some foreign workers who have returned to Israel, but the reduced supply has also led to higher salaries and higher recruitment costs.”
In addition, Turkey’s ban on trade with Israel has forced importers of building materials (aluminum, plastics and cement products) to look for alternative sources of supply, which are more expensive due to the high cost of production and transportation.
Israeli companies were looking to increase imports from Turkey after Houthi attacks in Yemen disrupted trade from the Red Sea, raising shipping costs and using longer alternative routes.
startups runaway
A poll reported by Maariv newspaper this month revealed that 43.73% of Israeli startups were established outside Israel in 2023, following the war.
The survey, conducted by the Israel Association of Advanced Industries, indicated that this number represents a significant jump from only 19.92% of companies established outside Israel in 2022, according to the newspaper.
During the current year, data for the first quarter shows that 62.45% of Israeli startups were established in Israel, compared to 37.55% that were established outside of it.
The Israel Advanced Industries Association says the survey was conducted in a systematic manner to collect clear, factual data on an important issue that reflects current trends in all aspects of Israeli technology activity.
“The survey represents a broad phenomenon that indicates a large-scale transfer of economic activity outside of Israel,” said the association’s CEO, Meir Rubinstein. “We know the reasons as well as the consequences for the Israeli economy and society.”
