Since the start of the annihilation war on Gaza about a year ago, Israel has been facing significant economic repercussions, the most prominent of which include economic slowdown and the decline of numerous vital sectors, leading to a noticeable rise in poverty rates. The ongoing war has severely impacted Israel’s economy, which was already grappling with challenges before its assault on Gaza, according to a report by France 24.
Before October 7th, Israel was already in the midst of an internal crisis, with widespread protests erupting in response to controversial judicial reforms proposed by Benjamin Netanyahu’s far-right government.
This internal crisis had already cast a shadow over Israel’s economy, undermining investor confidence and fueling social tensions.
Israel’s Economy Suffers Contraction and Downgrade in Credit Rating
With the onset of the war, the economic crisis has worsened significantly. Israel has been dealt a heavy blow due to military exhaustion and massive military spending that has claimed thousands of Palestinian lives, leading to a contraction in economic activities.
Experts predict that the negative impact of this war on Israel’s economy will persist, especially given the absence of any political or military solution to end the conflict, which only increases pressure on the Israeli government to find comprehensive solutions to the escalating economic and social consequences.
Israel’s economy shrank by 0.4% in the second quarter of 2024 in terms of per capita GDP.
While analysts from the Tel Aviv Stock Exchange had forecast a 5.9% growth for Israel’s economy in Q2 2024, which was the same figure Bloomberg projected, actual results fell short, showing only a 1.2% growth.
Major international credit rating agencies have downgraded Israel’s debt, which has led Netanyahu and Israeli officials to criticize these agencies. Netanyahu insisted that Israel’s economy is “stable and robust” and will recover once the war ends.
However, economist Jacques Bendelac told France 24 that “Israel’s economy is resilient, but it is struggling to bear the burden of this prolonged war,” warning that the economy could slip into recession if the conflict continues for much longer.
In August, Fitch predicted that the Gaza war, the longest conflict Israel has been engaged in since its establishment in 1948, could stretch into 2025. Major financial institutions have also expressed doubts about Israel’s ability to manage its financial challenges and achieve sustainable economic growth.
Both Citi Bank and JPMorgan have issued reports warning of recent macroeconomic data and future risks, according to Israeli economic newspaper Globes.
In its analysis, Citi Bank highlighted concerns expressed by international rating agencies that have recently downgraded Israel’s credit rating.
The bank pointed out that Israel’s credit standing remains in a precarious position, with no clear solution to the ongoing regional tensions. The difference between Israeli government bonds denominated in U.S. dollars and their American counterparts has reached around 200 basis points, according to the paper.
Citi Bank also warned of the high likelihood of further downgrades, particularly from Moody’s, due to doubts surrounding the Israeli government’s ability to manage its fiscal deficit.
The bank expects Israel’s budget deficit as a percentage of GDP to reach 7.6%, significantly higher than the Israeli Finance Ministry’s target of 6.6%.
This forecast reflects the bank’s skepticism regarding the Israeli government’s ability to either raise taxes or reduce spending. According to the bank, Israel may struggle to repair its budget in the aftermath of these economic shocks, which could jeopardize its financial stability.
JPMorgan also released a bleak report on Israel’s economy, cutting its GDP growth forecast for 2024 from 1.6% to 1.4%.
These figures indicate that Israel’s economic sectors are failing to cope with the fallout from the Gaza war, particularly in construction, agriculture, services, and tourism, as revealed by data from the Israeli Bureau of Statistics last month, with predictions of further gloom for the remainder of 2024.
One of the hardest-hit sectors in Q2 was exports, which dropped for the third consecutive quarter, recording a 7.1% decline.
Multiple Sectors Suffer
According to a Bloomberg report, Israel’s economy is experiencing a significant slowdown, largely due to a stagnation in the construction sector, which heavily relies on Palestinian labor from the West Bank.
Before the war, Israeli authorities issued nearly 100,000 work permits to Palestinians, significantly supporting construction, agriculture, and industry sectors.
In addition, tens of thousands of Palestinians worked informally in occupied territories. When the war broke out, these workers were barred from entering Israel, causing a severe impact on these sectors.
Despite government promises to replace Palestinian workers with foreign labor from countries like India, Bangladesh, and the Philippines, these plans have failed to bridge the gap, leading to a crisis in construction and agriculture sectors.
The tourism sector has also been heavily impacted since the war began, with a sharp decline in the number of tourists, whether for leisure or religious purposes.
According to the Israeli Ministry of Tourism, around 500,000 tourists visited Israel between January and July, a quarter of the number compared to the same period last year, reflecting the sharp downturn in this vital sector for Israel’s economy.
Tech Investors Abandon the Israeli Economy
A study published by the Israeli website “Calcalist” revealed that the high-tech sector and startups in Israel have been severely impacted by the Gaza war.
About 49% of high-tech companies and startups have canceled investments, while over 80% of companies and 74% of investors expressed doubts about the government’s ability to help this vital sector recover.
The study highlighted the more severe situation in northern Israel, where 69% of high-tech companies expressed significant concerns about their ability to attract investments in the coming year.
As a result, 40% of these companies are considering partially or fully relocating their operations to more stable and investment-friendly regions.
These findings indicate that the war is not only affecting traditional sectors like construction and agriculture but is also causing a slowdown in one of Israel’s most advanced economic sectors.
Rising Government Spending and Poverty
As the war continues, Israel’s economy has seen a significant increase in government spending, with public consumption rising by 8.2% in the last quarter compared to 2.6% in the previous quarter.
This increase in government spending, largely to meet the war’s demands, raises concerns among experts about the economy’s over-reliance on this growing public expenditure.
At the same time, Israel’s fiscal deficit continues to rise, reaching 8.1% of GDP by July, equivalent to 155.2 billion shekels ($47.1 billion), according to the latest report by Yali Rotenberg, Israel’s Accountant General at the Finance Ministry. This increasing deficit highlights the financial pressures the Israeli government faces due to enormous military spending and economic stagnation.
Economists warn that rising living costs and slowing economic growth will inevitably lead to a higher poverty rate in Israel.
Indeed, aid organizations in Israel have reported a surge in demand for their services, with more and more people seeking food assistance during distribution efforts.
According to a report by France 24, the organization “Pitchon Lev” (Open Heart) distributes baskets of fruit, vegetables, and meat twice a week to support families in Israel.
Eli Cohen, the organization’s founder, noted that its activities have doubled since the war began, with an increasing number of families in need. Currently, “Pitchon Lev” supports over 200,000 families.
