Prolonged Gaza war hits Israeli economy with substantial slowdown
Economy contracted 0.4% in April-June on a per capita basis when adjusted to population growth, and business production and exports dropped, according to statistics bureau data
Sharon Wrobel is a tech reporter for The Times of Israel.
Israel’s economy grew at a much slower pace in the second quarter of the year, falling short of economists’ forecasts, as the months-long war with the Hamas terror group continues to take a heavy toll on exports and investments, preliminary data by the Central Bureau of Statistics showed on Sunday.
Gross domestic product (GDP) grew at an annualized 1.2% in the April to June period from the previous three months, and was down 1.4% in comparison to the corresponding quarter last year, according to an initial estimate by the statistics bureau. The figure is below economists’ expectations, which ranged from 2.3% to 5%. Meanwhile, on a per capita basis, when adjusted for population growth, GDP contracted 0.4% in the second quarter.
“Gross domestic product per capita shrank both compared to the previous quarter and compared to the corresponding quarter last year, a figure that clearly indicates the significant damage that the ongoing war is causing to the economy,” said Bank Mizrahi-Tefahot chief markets economist Ronen Menachem.
The economy had bounced back at the start of the year, growing by an annualized 17.3% in the first three months of the year following a 20.6% contraction in the last quarter of 2023, when the outbreak of war with Hamas in Gaza on October 7 sharply curtailed consumer spending, trade, and investment.
The October onslaught saw Hamas terrorists rampage through southern Israel and kill some 1,200 people, mostly civilians, and kidnap 251. The Israel Defense Forces say 111 hostages remain in Gaza, 39 of whom have been declared dead.
During the second quarter, business production declined by 1.9% as exports of goods and services dropped 8.3%, according to data by the statistics bureau. Investment in fixed assets was up by a mere 1.1%.
“GDP growth disappoints in the second quarter due to a contraction in exports (goods and services) and weak investments,” said Jonathan Katz, chief economist at Leader Capital Markets.
Alongside the fighting in Gaza, Iran-backed Hamas ally Hezbollah has launched daily barrages of rockets into northern Israel for the past 10 months, trading fire with Israeli forces and fueling fears that the terror group’s attacks could escalate into full-blown war. Tens of thousands of residents near the Israel-Lebanon border have been displaced by the violence, and the security situation has disrupted workforce and business operations in both southern and northern communities.
Katz, who projected the economy to expand 2.3% said that the slower-than-expected growth figures were “mostly due to supply issues: construction investments are still down 26% year-on-year due to the lack of Palestinian workers.”
“The closure of businesses in the north and south (agricultural, commerce) is also impinging on growth,” he remarked.
The weak growth data comes on the heels of last week’s downgrade of Israel’s credit rating from A+ to A by Fitch, which said it expects the war to last well into 2025. The ratings agency warned that an escalation to multiple fronts could result in “significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.” Fitch was the third global credit agency to lower Israel’s credit rating this year, following S&P and Moody’s.
Private spending, one of the main drivers of economic activity, rose 12% in the second quarter after strong growth of 23.5% in the prior quarter, led by “wage growth and government support to evacuees and mobilized soldiers,” said Leader’s Katz.
The Bank of Israel in July slashed the economy’s growth outlook, citing an increased risk of an escalation with Lebanon’s Hezbollah on the northern border. The central bank expects the economy to grow by 1.5% in 2024, and 4.2% in 2025. That is down from a previous growth forecast in April of 2% in 2024 and 5% in 2025.
“Looking to the second half, it is likely that the economy’s activity will falter, however, much depends on the security developments in the region and on the question of the degree of intensity of the war’s effect on the economy,” said Mizrahi-Tefahot’s Menachem. “The economy is at full employment, the number of vacancies is increasing, as is the difficulty of filling positions with professional workers, which will continue to restrain activity and GDP growth.”
Times of Israel staff contributed to this report.
