Israel economy is facing significant challenges due to the ongoing war in Gaza. Fitch Ratings recently downgraded Israel’s credit score from A+ to A, citing the continued conflict and heightened geopolitical risks. The agency also maintained a “negative” outlook, indicating a further downgrade is possible.
The war has resulted in a significant decline in Israel’s economic growth, with output growing by only 2.5% in the first half of 2024, down from 4.5% in the same period last year.
The country’s tech sector has been largely unaffected, but other parts of the economy have taken a hit. Private consumption has dropped by 27%, exports have declined, and investment by businesses has slowed.
The conflict has also led to a significant increase in government spending, with a 93% increase in military expenditure in the last three months of 2023 compared to the same period in 2022. This has resulted in a steep rise in debt, with Fitch expecting Israel’s debt to remain above 70% of GDP in the medium-term.
Finance Minister Bezalel Smotrich has expressed confidence that the deficit will fall back to 6.6% this year, but doubts remain about the budget’s timeline. The Central Bank chief has called on Prime Minister Benjamin Netanyahu to speed up the 2025 state budget, warning that further delays risk stoking financial market instability.
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The conflict also risks broadening to other fronts, with tensions between Israel and Iran escalating. A decades-old shadow war between the two countries surfaced in April, and there are fears that the conflict in Gaza could metastasize into a regional conflict.
Experts warn that a prolonged war would come with high costs and greater deficits for Israel, undermining its debt profile and incurring additional costs such as labor shortages and infrastructure damage. There is also the possibility of international sanctions against Israel.
The government’s handling of the Israel economy has been criticized, with some arguing that continued conflict serves political interests rather than avoiding the costs of war. As the situation continues to unfold, it remains to be seen how Israel’s economy will fare in the face of ongoing conflict and geopolitical tensions.
