Israel’s economy is under multi-level pressure, a year after the start of the ongoing aggression on the Gaza Strip, which began with exorbitant military expenditures and did not end with a “nightmare” scenario that investors warn of, but things are moving towards an escalation on multiple fronts, which indicates that the biggest decline in economic indicators is yet to come.
The occupation army raised its total estimate of the cost of the war from 130 billion shekels ($36.7 billion) to between 140 and 150 billion shekels ($39.5-42.4 billion), pointing out that these costs do not include the possibility of launching a ground operation in Lebanon or a direct military confrontation with Iran. This means that the cost may rise further in the event of an additional escalation, according to what the Israeli newspaper Calcalist reported.
This large increase represents an additional challenge to the Israeli budget in 2025, according to the newspaper, and confirms once again the extent of the difficulty that Israel faces in maintaining its financial stability under these difficult circumstances.
Economy growth
The latest Israeli data reflects the difficult economic situation:
- The Central Bureau of Statistics lowered the economic growth rate in the second quarter to 0.7% on an annual basis (from last April to June) from the initial estimate issued in August of 1.2%.
- GDP growth in the first quarter was revised slightly to 17.2% from 17.3% on a quarterly basis, as the economy recovered from a sharp contraction in the last quarter of 2023 when the war on Gaza began.
- The Ministry of Finance lowered its growth forecasts for the current year, confirming the pressures imposed by the ongoing war for nearly a year. The gross domestic product is expected to rise by 1.1%, according to figures updated on the ministry’s official website last month, down from the previous figure of 1.9%, and expectations for 2025 have been lowered to 4.4% from 4.6%.
- Thus, the economy is expected to grow at the slowest pace this year since 2009, with the exception of the peak of the Corona pandemic in 2020.
- The war prompted the Knesset (Parliament) to pass an additional budget increase for the fiscal year 2024 to reach 727.4 billion shekels ($192 billion). andThe Knesset approved a new increase of NIS 3.4 billion ($924 million) to help finance the evacuation of civilians and disbursement to reserve soldiers until the end of this year.
- In the last quarter of last year, the economy shrank by 21% (the quarter in which the war began) on an annual basis compared to the previous quarter, according to the Israeli Central Bureau of Statistics.
- The Ministry of Finance reported in a report that debt reached 160 billion shekels ($43 billion) in 2023, including 81 billion shekels ($21.6 billion) after the outbreak of the war in October until the end of 2023.
Budget deficit
Israeli Finance announced last month that the budget deficit reached 12.1 billion shekels ($3.24 billion) last August.
She added that the deficit relative to gross domestic product rose in the 12 months to August to 8.3% from 8% in July, compared to a target of 6.6% for the entire year 2024.
Spending on the war waged by Israel since October 2023 amounted to about 97 billion shekels ($26 billion). The Ministry expected that the deficit would continue to rise during the third quarter.
Credit rating
Late last month, Moody’s lowered Israel’s credit rating by two notches at once, and maintained its negative rating outlook due to “geopolitical risks” resulting from the escalation of the conflict with Hezbollah and the prediction of a long-term war.
The agency decided to downgrade the rating from “A2” to “Baa1,” which is its second downgrade of Israel’s rating this year.
Moody’s said in a statement, “The main motivation behind the downgrade is the belief that geopolitical risks have worsened significantly to very high levels, which portends material negative consequences for Israel’s creditworthiness in the near and long term.”
The following are the most prominent credit rating assessments for Israel during the year:
- Fitch agency lowered its credit rating for Israel last August, and maintained its negative rating outlook.
- Last February, Moody’s lowered its credit rating for Israel, attributing this to the war on the Gaza Strip and its repercussions. The agency also expected debt burdens to rise above expectations before the war on Gaza.
- Data from Standard & Poor’s Global Market Intelligence last month showed that the cost of insuring Israeli sovereign debt against default reached its highest levels since the start of the war on Gaza in October of last year.
- The cost of 5-year credit default swap contracts reached 149 basis points, compared to the closing level on September 20 of last year at 146 basis points, and the price was the highest since October of last year.
- Since last October 7, Israel has turned, more than once, to international debt markets to provide the necessary liquidity to finance its war on the Gaza Strip and the escalation of the confrontation with Hezbollah.
Tourism
The tourism sector in Israel incurred a loss amounting to 19.5 billion shekels ($5.25 billion) within a year of the aggression on Gaza and its repercussions in the region, according to what the Israeli newspaper The Jerusalem Post reported.
Losses in the international tourism sector amounted to 18.7 billion shekels ($5.04 billion), while losses in the domestic tourism sector amounted to 756 million shekels ($204 million), especially in northern Israel, according to figures quoted by the newspaper from the Ministry of Tourism.
The Ministry stated that about 853,000 tourists entered Israel, topping the list were those coming from the United States, France, Britain, Russia and the Philippines. Two-thirds of the visitors were Jews (62%), and 29% were Evangelical Christians or Catholics.
According to data reported by the newspaper, 44% of visitors came to visit friends and family, 28% were tourists, and 13% came to work.
Israeli tourism data stated that 68,712 residents – most of them from the north – are still displaced from their places of residence, and about 15,600 of them are living in hotels, while 53,113 displaced people are living in other places of residence.
The Ministry of Tourism estimated the cost of housing the displaced at approximately 5.45 billion shekels ($1.5 billion) and was transferred to nearby hotels, noting that an additional 3.18 billion shekels ($859 million) were paid directly as living grants to the displaced who chose to live in places other than hotels.
The cost of displacement
The cost of the displacement of 100,000 residents from direct war zones amounted to 8.648 billion shekels ($2.34 billion), including 5.46 billion shekels ($1.5 billion) in hotel expenses.
Israeli tourism booked about 4 million rooms and 13.5 million nights of stay.
An additional 3.2 billion shekels ($864 million) were paid in the form of residency grants. These grants provide 18,000 shekels ($4,858) per month net for a family consisting of two adults and two children, and are now the preferred solution for dealing with the displacement crisis, as 53,113 families receive it. These grants, according to the Jerusalem Post, quoted the ministry.
Israeli Tourism added that the war in Gaza stopped the tourism industry sector’s recovery from the Corona crisis that hit it hard in 2020.
Expectations are that the year 2024 will end with only about a million tourists entering Israel, that is, a third of the tourists who entered the occupying state last year, and less than a quarter of those entering in 2019.
Inflation
The inflation rate in Israel rose last August to its highest rate in about a year at 3.6% from 3.2% in July, which is the highest level since last October, according to data from the Central Bureau of Statistics showed last month.
The Consumer Price Index rose by a higher-than-expected 0.9% in August compared to July, supported by higher costs for fresh produce, food, housing, transportation, education and entertainment, with the increase only partially offset by declines in clothing, footwear, communications and furniture.
In August, increases were recorded in the costs of fresh vegetables, which jumped by 13.2%, transportation costs rose by 2.8%, housing by 0.6%, and culture and entertainment by 0.5%, according to the statistics office.
Money flight
The Economist said that the pace of money fleeing from Israeli banks to foreign institutions doubled between last May and July, as investors prepared for the “nightmare scenario” if war engulfed Tel Aviv and occupied Jerusalem.
The British newspaper pointed out that investors are not sure of Israel’s ability to recover, as the shekel is volatile and Israeli banks are suffering from capital flight.
According to the Economist, the three largest Israeli banks report a significant increase in the number of customers requesting to transfer their savings to other countries or link them to the dollar, adding that they are resigned to things getting worse.
It found in its report that the situation of Israel’s economy has become more difficult compared to the first periods of the war on Gaza, as its gross domestic product grew by only 0.7% between last April and June on an annual basis, that is, about 5.2 percentage points less than economists’ expectations, according to To Bloomberg News Agency.
The newspaper pointed out that money began to flee from Israel. Between last May and July, outflows from Israeli banks to foreign institutions doubled compared to the same period last year to two billion dollars, at a time when economic policymakers in Israel are more worried than they were. It has been there since the beginning of the conflict.
The report indicated that Israel refused to issue work permits to about 80,000 Palestinian workers after October 7, 2023, and they were not replaced. As a result, the construction industry declined by 40% compared to the same period last year, which greatly hampered housing construction and repair.
Nightmare
The Economist stated that the “nightmare scenario” is that a few investors are preparing for a war that could include all of Israel, including occupied Jerusalem and Tel Aviv.
Under this scenario, economic growth will be severely damaged, perhaps even more than what happened after October 7, 2023. Army expenditures will jump to major levels, and the flight of investors may lead to the overthrow of banks and the dropping of the shekel, forcing the Israeli Central Bank to intervene and spend its reserves.
The newspaper concluded its report by pointing out that whatever events turn out, Israeli economists are resigned to things getting worse, and even Finance Minister Bezalel Smotrich – who generally tends to be optimistic – is now showing a feeling of exhaustion, saying, “We are in the longest and most expensive war in Israel’s history.”
