Israel’s Economy Shrinks Nearly 20% in Q4 2023

Official data released recently has revealed a significant contraction in Israel’s economy, with a staggering annualised decline of almost 20% in the final quarter of 2023. This unexpected downturn, far surpassing analysts’ forecasts, was primarily attributed to the substantial resources diverted towards Israel’s conflict against Hamas in Gaza.

The gross domestic product (GDP) plummeted by an annualised 19.4% compared to the preceding quarter, while on a quarter-by-quarter basis, the economy contracted by 5.2%. The Central Bureau of Statistics attributed this sharp decline to various factors, including the mobilisation of around 300,000 reservists for military service, disrupting workplaces and businesses across the nation.

Additionally, the government’s sponsorship of housing for over 120,000 Israelis evacuated from border areas further strained the economy. The imposition of stringent restrictions on Palestinian workers’ movement from the West Bank exacerbated the situation, particularly affecting the construction sector due to labor shortages.

Despite ending the year with modest overall growth of 2% compared to 2022, down from 6.5% in the previous year, Israel faced a significant economic toll from the conflict. Government spending surged by 88% in the aftermath of the war, while consumer spending plummeted by 27%. Imports of goods and services witnessed a sharp decline of 42%, alongside an 18% drop in exports.

Moody’s, the renowned rating agency, responded to the situation by downgrading Israel’s sovereign rating from A1 to A2, expressing concerns about the prolonged conflict in Gaza and its broader implications for the economy. The agency also revised Israel’s debt outlook to negative, citing the potential risk of the conflict spreading to the northern front against Hezbollah.

In response to the downgrade, Israeli Prime Minister Benjamin Netanyahu attributed the rating adjustment solely to the ongoing conflict, expressing confidence in Israel’s ability to achieve victory. Netanyahu reiterated his commitment to continue the fight until “total victory” against Hamas is secured, signalling a determination to persevere despite the economic challenges.

While Israel’s per capita GDP remained relatively robust compared to other nations, experiencing only a marginal 0.1% decline in 2023 despite a 2.2% population growth, the economic repercussions of the conflict underscore the formidable challenges facing the nation. As Israel navigates through this turbulent period, the focus remains on mitigating the economic fallout while steadfastly pursuing its strategic objectives in the region.