Israel’s economy shrinks due to Gaza war

January 19th data showed Israel’s economy to have shrunk in the fourth quarter (Q4) due to the war in Gaza, according to Reuters.

The contraction is a result in lessening general spending, travel, and investment upon the outbreak of the war in late 2023. A massive call up of reservists, and the displacement of Israelis from towns bordering Gaza and Lebanon also helped stunt the economy.

Israel’s Central Bureau of Statistics claimed “The contraction of the economy in the fourth quarter of 2023 was directly affected by the outbreak of the Iron Swords War on October 7.”

Until Hamas’ October 7th attack on southern Israel, the country’s economy was on track for 3.5% growth in 2023, then dashed by a 26.9% drop in private spending, 18.3% in exports, and 67% in investments in fixed assets, especially in residential building.

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Overall Government spending in Q4 jumped 88.1%, mainly on war expenses and in compensation for businesses and households impacted.

According to the bureau’s figures, the $500 bn economy contracted an annual 19.4% in the Q4 of 2023, although the year ended with 2.0% of positive growth overall in line with Bank of Israel and the country’s Finance Ministry projections.

While the growth is a significant reduction from 2022’s 6.5%, it sits above the Organization for Economic Cooperation and Development (OECD) average of 1.7%. Per capita GDP slipped 0.1% compared to the OECD average of 1.2% growth.

The GDP data follows Israel’s inflation rates easing to a more than two year low of 2.6% in January. A slowing economy and inflation back within a 1-3% target would typically be enough to prompt another rate reduction, after a quarter-point cut in January. However, some analysts believe that policy makers intend to play it safe, focusing on maintaining financial stability.

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Interest rates are next decided on February 26th.

Overall, 2023’s private spending fell 0.7%, exports dipped 1.1% and investment in fixed assets slipped 1.9%, while government spending rose 8.3%.

The shekel was 0.6% weaker versus the dollar, while the main Tel Aviv 125 (.TA125), opens new tab share index rose 0.6% after the data were announced.

Dependent on developments with the conflict, Israel’s economy is expected to grow as much as 2% in 2024. The country’s central bank expects a sharp economic rebound in 2025, with a view that the Israeli economy, led by the high-tech sector, is fundamentally sound and has proven its resilience through prior conflicts.



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