The ongoing war with the Hamas terror group is having a “significant impact” on Israel’s economy, the Organisation for Economic Co-operation and Development (OECD) cautioned on Wednesday, citing a temporary but pronounced slowdown in private consumption and investment growth.
The OECD lowered the GDP forecast for Israel to 2.3 percent in 2023 from 2.9% projected back in June, and to 1.5% in 2024 versus 3.3% previously. That’s after the Bank of Israel on Monday shaved its growth outlook and now expects the economy to grow by 2% in 2023 and 2024, respectively.
Assuming that the war will be concentrated mainly on the southern front, with no further regional escalation, the OECD assessed that the main economic impact will be confined to the last quarter of 2023 and to a lesser extent the first quarter of 2024.
As such, the organization sees the Israeli economy recovering in 2025 and expanding at a growth rate of 4.5%.
“The economic impact of the evolving conflict following Hamas’s terrorist attacks on Israel on 7 October is highly uncertain and depends on the duration, scope and intensity of the conflict,” the OECD stated in the report. “Supply side disruptions due to the security situation and the significant decline in the civilian labor force, together with weakening economic sentiment, will mainly affect private consumption and investment.”
“A drop in tourism will weigh on export growth,” the organization projected.
Israel is 54 days into a war with Hamas, which began October 7 when some 3,000 terrorists streamed into Israel by land, sea and air and murdered some 1,200 people, mostly civilians, while taking hostages of all ages into Gaza.
The Israeli army has called up more than 350,000 reservists to join the fighting, aiming to topple the Iran-backed Hamas that has ruled the Gaza Strip since 2007, and bring back the hostages.
The economic fallout from the war and expected downturn in private consumption and demand, has also prompted the Finance Ministry and global credit rating agencies to cut their growth prospects in recent weeks, as the fighting is estimated to cost the economy as much as NIS 200 billion ($54 billion).
“With increased spending on defense, security, reconstruction and interest payments in the medium term, some re-prioritization of permanent expenditure, based on spending reviews, will be needed to mitigate the impact on the public finances,” the OECD cautioned. “Growth-enhancing spending, including for infrastructure investment and to improve educational outcomes, should be safeguarded.”
In the medium term, the organization called on the Israeli government to introduce labor market and educational reforms to address demographic challenges and reduce wide labor market disparities across the country’s population.