War-battered economy plunged almost 20%, marking sharpest contraction since pandemic

With the outbreak of the war, private consumption and investments dropped sharply, while government spending soared amid massive reservist callup and wide population displacements

Sharon Wrobel is a tech reporter for The Times of Israel.

Families of Israelis held hostage by Hamas terroriststake cover as a siren alert is sounded at the 'Hostage Square' outside the Art Museum of Tel Aviv, October 28, 2023. (Miriam Alster/Flash90)
Families of Israelis held hostage by Hamas terroriststake cover as a siren alert is sounded at the 'Hostage Square' outside the Art Museum of Tel Aviv, October 28, 2023. (Miriam Alster/Flash90)

Israel’s economy shrank by nearly one-fifth in the last three months of 2023, as war with the Hamas terror group in Gaza took a heavy toll on consumer spending, trade and investment, data released Monday showed.

The country’s gross domestic product recorded a 19.4 percent drop-off of its annual rate in the fourth quarter of 2023, according to the preliminary figures published by the Central Bureau of Statistics.

The decline marks the deepest three-month tumble since the second quarter of 2020, when the economy plunged almost 30% as the coronavirus pandemic-related lockdowns hurt consumer spending and left many businesses closed.

This time it was war that devastated the economy, following the Hamas-led onslaught of October 7, in which Palestinian terrorists killed some 1,200 people and kidnapped hundreds of others.

In response, Israel called up hundreds of thousands of reservists to join the fighting and evacuated large swaths of the Gaza and Lebanon border, with businesses shutting and people staying home under a rain of rockets as the country shifted to a war footing. Sectors that rely on foreign labor forces, such as construction and agriculture, were especially hard hit.

Though the war is ongoing, many reservists have returned home and economic activity has begun to recover as rocket fire from Gaza on Israeli cities has trailed off, though only some of that gradual recovery is reflected in the new numbers.

A woman walks next to pictures of civilians held hostage by Hamas terrorists in Gaza, in Jerusalem, November 22, 2023. (Yonatan Sindel/Flash90)

“To a large extent, the current GDP figure, which is an initial estimate, is based on data from the beginning of the quarter, that is October to November data,” said Yonie Fanning, chief strategist at Mizrahi-Tefahot Bank. “The level of local activity continued to recover in December, with the decline in rocket attacks raining on the country.”

“We will see this reflected significantly in the update of the local GDP figures, next month, as more data comes on,” Fanning added.

The double-digit contraction came after the economy grew by 2.7% in the third quarter of 2023. Much of the slide in gross domestic product stemmed from a 26.9% drop in private consumption in the October to December period, a sharp decline of 42.4% in the import of goods and services, an 18.3% dive in exports, and an 67.8% decline in investment in fixed assets, especially in residential building. Meanwhile, government spending surged 88.1% due to the war costs.

A man looks at the damage caused to the Yad Mordechai Museum from a rocket fired from the Gaza Strip a few weeks ago, in Kibbutz Yad Mordechai, on December 21, 2023. (Yossi Zamir/Flash90)

On a year-over-year basis, the preliminary data from the statistics bureau showed that Israel’s economy expanded 2% in 2023 after growing at a fast pace of 6.5% in 2022. The annual GDP figure is in line with forecasts by the Bank of Israel and is above the average growth rate of 1.7% among OECD countries.

Private consumption decreased by 0.7% in 2023 after a 7.4% increase in 2022. The import of goods and services fell in 2023 by 6.9%, after growing 12% in 2022. Exports of goods and services slid 1.1% in 2023 versus an increase of 8.6 in the year earlier.

The economic fallout from the war and expected downturn in private consumption and demand and investment in sectors such as construction, prompted the Finance Ministry, the Bank of Israel, and global credit rating agencies to cut their growth prospects for 2023 in recent weeks, as the fighting is estimated to cost the economy as much as NIS 255 billion.

The OECD lowered the GDP forecast for Israel to 2.3% in 2023 from 2.9% projected before the outbreak of the war. The Bank of Israel shaved its growth outlook in November and expects the economy to grow by 2% in 2023 and 2024, respectively. Going forward, the OECD forecasts the economy to grow at a rate of 1.5% this year, versus 3.3% previously, and expand by 4.5% in 2025.

Earlier this month, US ratings agency Moody’s cut Israel’s credit rating by one notch from A1 to A2, and changed its outlook to “negative,” citing the impact of the ongoing war with the Hamas terror group in Gaza on the government’s debt burden, as well as fiscal and political risks.

However, the ratings agency also commended that “so far the economy has managed the fall-out from the conflict reasonably well, with high-frequency indicators pointing to a swift rebound over the past three months.”

Bank Hapoalim chief strategist Modi Shafrir said that economic activity improved compared to the paralysis of the months of October to November, which can be seen in the data for credit card purchases, foreign trade, and in increase in demand for employees in January.

Smoke rises from a house in the Israeli community of Avivim that was hit by an anti-tank rocket fired across the border from Lebanon, December 24 2023. (Courtesy)

Bank Hapoalim expects the Israeli economy to return to positive growth in the first quarter of this year, but to be still below the level of the third quarter of 2023 before the outbreak of the war.

“What is now delaying the closing of the gap in economic activity is mainly the construction industry, which has slowed due to the absence of Palestinian workers, in addition to muted economic activity in areas of tourism and agriculture in the north of the country and southern communities around Gaza,” Bank Hapoalim wrote in a research note.

With the outbreak of the war, Palestinian workers, upon which the construction industry relies, disappeared overnight, as Israel enacted an immediate ban on workers from Gaza and restricted access to most of those from the West Bank. Thousands of foreign workers from China, Thailand, the Philippines and other countries also went home following the shock attack, as the economy ground to a halt. In recent weeks, some building sites are getting back to work after weeks of being shuttered.

Amid the ongoing war, some 200,000 Israelis have been evacuated from their homes in the destroyed south and the threatened north, facing long months of uncertainty as reconstruction plans slowly take shape.

Times of Israel staff contributed to this report.

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