Israel

Israel Politics October 2023

Israel: Economic prospects for Q4 and 2024 deteriorate due to war

—GDP to take a hit in Q4 and 2024.

—The shekel has reached an over-decade low in recent weeks.

—The fiscal deficit is likely to widen in the coming quarters due to lower growth and extra military spending.

Israel declared war on Hamas in early October after the latter attacked Israel. Over 300,000 Israeli reservists have been mobilized for the Israeli land invasion of the Gaza Strip—governed by Hamas. Israel has evacuated towns close to the Gaza border, delayed the start of the school year at universities, and shuttered schools—though many schools reopened in late October.

If the conflict remains circumscribed to the Gaza Strip, most of the hit to GDP should be felt in Q4 2023, with some further fallout in 2024. Our panelists currently see economic growth slowing to a near standstill in Q4, weighed on by lower tourism and investment, the closure of educational establishments, disruptions to supply chains and business activity due to the internal displacement of citizens and the military mobilization, and restrictions on the entry of Palestinian workers to Israel hitting labor supply.

The war has already caused the shekel to breach the ILS 4.0 per USD barrier and depreciate to an over-decade low against the USD, which will keep inflation higher than would otherwise have been the case. However, the Central Bank has announced it will intervene in the FX market to defend the currency: This should stop the shekel from weakening much further, and our Consensus is for the currency to strengthen markedly by end-2024 from its current depressed level.

Regarding monetary policy, a war limited to the Gaza Strip increases the chance of rate cuts by the Bank of Israel. This is currently the scenario envisaged by only one of our panelists, though, with most other panelists likely wagering that shekel weakness will discourage the Bank from easing monetary policy.

On the fiscal front, the combination of slower GDP growth and higher defense expenditure will likely lead to a broader budget deficit in the coming quarters relative to pre-war projections, notwithstanding U.S. financial support. Over the last month, our panelists have revised their estimations upwards for the 2024 fiscal deficit by 0.6 percentage points, with further upward revisions likely ahead.

If a second front opens in the conflict—such as against the paramilitary group Hezbollah in southern Lebanon or in the West Bank—GDP would be hit much more than in a Gaza Strip-only scenario, the shekel would weaken further, the Bank of Israel would cut rates and the fiscal deficit and public debt would rise.

Prime Minister Netanyahu formed an emergency government with Benny Gantz of the National Unity coalition in October, set to last for the duration of the war. The upshot should be a focus on military operations and the likely shelving for now of the remaining reforms that Netanyahu’s government had proposed to weaken the supreme court. If these reforms are eventually discarded permanently, it would bode well for business sentiment and investment once the conflict is over.

On the external front, relations with Arab neighbors are likely to cool, and any further rapprochement—such as the negotiations underway to normalize relations with Saudi Arabia—is not on the cards while the war persists. Relations with Iran will be particularly tense, with the outside risk of them boiling over into outright Iran-Israel conflict.

On the outlook, EIU analysts said: “A contained confrontation would have a modest dampening impact on the Israeli economy, which would continue to function despite the immediate and short-term disruption to domestic and international travel, transport and logistics […]. A multi-front proxy war would have a major impact on the Israeli economy as the country in effect enters lockdown. Major disruption would affect most aspects of economic activity, especially travel and tourism, transport and logistics, manufacturing, mining and the technology industry. The Israeli labour force would shrink for a prolonged period by about 450,000 as reservists called up for active duty remain engaged in the fight.”

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest