Ahmad Abdel-Rahman
April 19, 2024

Israel's economy shrinks by more than 19 percent as a result of the war in Gaza

As the cost of the war in Gaza rises, the Israeli economy is facing the most severe losses in its history. Companies are facing heavy losses as production falters amid a record call-up of reservists. Recent data showed that quarterly gross domestic product (GDP) declined by 19.4 per cent on a seasonally adjusted annual basis during the last three months of last year. This is the first time there has been a decline in two years and is much worse than expected, as analysts expected a decline of 10.5 per cent on average, according to a survey conducted by Bloomberg.

The Israeli currency (the shekel) fell by 0.4 per cent against the US dollar after the release of the latest data. Although the conflict halted the economy's momentum at the end of 2023, GDP expanded by two per cent throughout that year, which is consistent with the expectations of the research department of the Bank of Israel, Israel's central bank. Israel's Minister of Finance, Bezalel Smotrich, also expected growth of 1.6 percent.

The data is the first official statistic on the war's repercussions on GDP. It also reflects the extent of the turmoil that affected the USD520 billion economy in the wake of Hamas' sudden attack on October 7, 2023.

The call-up of reserve forces depleted nearly eight per cent of the workforce. Restrictions similar to the lockdowns imposed during the Covid-19 pandemic, caused a collapse in manufacturing activity, hitting consumption, and briefly evacuating schools, offices and construction sites.

The procedures and measures announced by the Israeli government aimed at reducing the war's repercussions on the markets, with the country's central bank pledging to sell USD30 billion in reserves to support the local currency.

A credit rating downgrade and a negative outlook

A few days ago, Israel received its first-ever downgrade of its sovereign rating. Moody's lowered Israel's credit rating, citing political and financial risks to the country as a result of the war it is waging with Hamas. The agency stated in a recent report that the impact of the conflict raises political risks and weakens Israel's executive and legislative institutions and its financial strength in the foreseeable future.

Israel's credit rating dropped by one notch, from A1 to A2, while the agency kept its credit outlook at negative, meaning the rating could be downgraded again.

Moody's expects Israel's debt burden to be higher than pre-war expectations, and defence spending to reach nearly double the 2022 level by the end of this year. This is the first time that Israel has seen its economy, and credit rating, downgraded in the long term. Moody's lowered its outlook for Israel's debt to "negative" due to the "risk of escalation" of its war with Hezbollah in Lebanon along its northern border. "The risk of an escalation involving Hezbollah in northern Israel remains, which is likely to have a much more negative impact on the economy, Moody's said in its report.

Moody's also spoke of a "weak security environment", which "involves greater social risks," as well as "weak executive and legislative institutions".

The dangers of war on the economy have become clearer

A few days ago, the credit rating agency Standard & Poor's said that it might lower Israel's rating if the war with Hamas expands to include other fronts. However, it is expected that Israel will be able to bear the economic repercussions of the war, if it does not expand by making the necessary adjustments in the budget to compensate for the increase in spending.

Last October, the agency confirmed Israel's rating at the "AA-" level, but revised its outlook to negative from stable, pointing to the dangers of expanding the war between Israel and Hamas, with a more pronounced impact on the economy and the security situation.

Director of sovereign debt and public finance ratings for Europe, the Middle East and Africa at Standard & Poor's, Maxim Rybnikov, said: "Currently negative expectations indicate at least one chance of a rating downgrade within the next year or two."

Rybnikov explained that if the security and geopolitical risks facing Israel increase due to the escalation of the conflict (a direct confrontation with Hezbollah in Lebanon or a confrontation with Iran) this could lead to a downgrade in the rating. He added: "We can also lower the rating if it is proven that the impact of the conflict on Israel's economic growth, financial situation, and the balance of payments is more profound than we currently expect."

Photo: The Israeli economy has shrunk by about 19 per cent because of the war on Gaza. (by Adobe)