Israeli economy shrinks by almost 20% amid war in Gaza

The Israeli economy saw a 19.4% downturn during the last quarter of 2023, according to preliminary estimates published by Israel's Central Bureau of Statistics (CBS). The specific period of the decline coincides with Israel's war against Hamas, which began on Oct. 7, the last day of the fall Jewish holiday season.

The ongoing war has had significant negative effects on Israel's economy and society at large and constitutes the most serious decline since the COVID-19 pandemic lockdowns, which caused the economy to shrink by approximately 30%.

The latest economic decline can mostly be attributed to a 26.9% decrease in private consumption during the period from October to December 2023. In addition, imports fell during this period by a whopping 42.4%, while exports shrank by 18.3%.

Israel’s $500-billion economy had been experiencing many consecutive years of rapid growth compared to other developed economies.

Yonie Fanning, chief strategist at the Israeli Mizrahi-Tefahot Bank, argues that the current statistics are based on data from the beginning of the quarter, at a time when Israel was under intense rocket fire that brought many businesses to a standstill.

“To a large extent, the current GDP figure, which is an initial estimate, is based on data from the beginning of the quarter, that is October to November data.”

"The level of local activity continued to recover in December, with the decline in rocket attacks raining on the country,” Fanning continued.

He believes Israel will see a gradual recovery as early as March.

“We will see this reflected significantly in the update of the local GDP figures, next month, as more data comes on.”

Following the devastating Oct. 7 invasion of southern Israel, the Israeli military mobilized more than 300,000 reservists in just 48 hours to confront the Hamas threat in Gaza and the threat from Hezbollah forces on Israel's northern border with Lebanon. The mobilization, while necessary, had a significant negative impact on the economy. Reservists, who typically hold professional jobs in various industries, including Israel's renowned high-tech industry, were called away from their civilian roles to fulfill their military duties. Their absence from their civilian jobs had a notable impact on productivity, potentially causing disruptions and losses in certain sectors.

Earlier this month, the credit agency Moody's downgraded Israel’s credit rating for the first time ever. The global agency also lowered its forecast of the Israeli economy from ‘stable’ to ‘negative.’

Despite the Hamas war and the recent Moody's downgrade, there is continued market confidence in the Israeli shekel.

Chief Economist Gil Bufman at Bank Leumi, one of Israel’s leading banks, says the Israeli economy is gradually recovering.

“It seems like the economy is coming back,” Bufman said, stressing that “demand is coming back” for the Israeli currency after a “terrible month” in October.

Bank of Israel's governor, Amir Yaron, echoed a similar sentiment: “The Israeli economy is rooted on strong and healthy economic fundamentals, and Israel is a world leader in the fields of innovation and technology.”