Israel finance ministry slashes growth forecast as war in Gaza hits economy

By Galit Altstein

Israel’s finance ministry slashed its projection for growth this year, underlining the strain that the almost year-long war in Gaza has put on the country’s economy.
 

Gross domestic product will rise 1.1 per cent, according to updated figures on the ministry’s official website, down from the previous figure of 1.9 per cent. The projection for 2025 was lowered to 4.4 per cent from 4.6 per cent.

The new projection — attributed to “weaker-than-expected” data in the second quarter — means Israel’s economy is set to grow at the slowest pace this year since around 2009, with the exception of the Covid-19 pandemic in 2020.

The war in Gaza, started when Hamas militants swarmed into Israel on Oct. 7, and skirmishes with Hezbollah fighters in Lebanon have caused Israeli defense spending and the country’s fiscal deficit to surge. Sectors such as construction, agriculture and tourism have slumped.

Israel’s been downgraded for the first time in its history — though it retains high investment-grade ratings in the single-A range. The government’s local-currency bond yields have also risen significantly relative to US Treasuries, indicating nervousness among investors.

Israeli officials have estimated a war bill through the end of next year of roughly $66 billion, an amount equivalent to more than 12 per cent of GDP.

Fitch Ratings lowered Israel’s debt rating by one level to A from A+ last month, saying the conflict in Gaza “could last well into 2025 and there are risks of it broadening to other fronts.” The rating company says the fiscal deficit could reach 7.8 per cent of GDP this year, up from 4.1 per cent in 2023.

Hamas, designated a terrorist organization by the US and the European Union, killed 1,200 people and took 250 hostage with its attack on southern Israel in October. Israel’s offensive on Gaza has killed more than 40,000 people, according to the Palestinian territory’s Hamas-run health ministry, which doesn’t distinguish between militants and civilians.

US President Joe Biden and his counterparts in Qatar and Egypt are trying get Israel and Hamas to agree to a cease-fire. The White House may present a new proposal to the two sides in the coming days to help end a deadlock in the negotiations.

The Israeli finance ministry’s projections presume fighting with Hezbollah, a group more powerful than Hamas, does not escalate into a full-on war. Fears of such a scenario have risen in recent months.

Despite economic growth slowing, the Israel’s central bank is unlikely to reduce cut its key interest rate from 4.5 per cent before next year. Israel’s inflation has accelerated in recent months, with the latest reading at 3.2 per cent year-on-year — above the 1 per cent-3 per cent target range.

The Bank of Israel’s deputy governor, Andrew Abir, told Bloomberg last month he doubts the conditions will be in place for monetary easing before the end of the year.

“The surprise has been how long the war has been going on,” he said.