Israeli economy suffers with 19.4% Q4 drop as Gaza war continues

Israelis sharply curtailed spending, traveling, and investing at the end of 2023 as Israel's all-out war on Palestinian Hamas militants in Gaza exacted a heavy toll on the economy, data released on Monday showed.

The war had stopped economic growth in its tracks, especially with a massive call-up of reserves and tens of thousands displaced from border towns near Gaza and Lebanon due to constant rocket attacks from Hamas and Hezbollah.

The $500 billion economy contracted an annual 19.4 percent in the fourth quarter from the prior three months, the Central Bureau of Statistics said in an initial gross domestic product (GDP) estimate that was double the rate expected in a Reuters consensus.

Still, 2023 as a whole ended with positive growth.

"The contraction of the economy in the fourth quarter of 2023 was directly affected by the outbreak of the Iron Swords War on Oct. 7," the statistics bureau said.

For all of 2023, the economy grew 2.0 percent, compared with 6.5 percent in 2022 but above an Organization for Economic Cooperation and Development (OECD) average of 1.7 percent. However, per capita GDP slipped 0.1% last year versus an OECD average of 1.2 percent growth.

Until Hamas' Oct. 7 cross-border attack on southern Israel, Israel's economy was on track for growth of some 3.5 percent in 2023. But October was a particularly tough month with most Israelis - many of whom knew those killed or kidnapped in the rampage - in no mood to shop, while movie theatres and other forms of entertainment were largely closed, although now these are open.

Depending on the length of the conflict and whether it expands to other fronts, the economy is expected to grow as much as 2 percent in 2024. 

The central bank and others expect a sharp economic rebound in 2025 on a view that Israel's economy is fundamentally sound, led by the high-tech sector, and has shown resilience after prior conflicts.

The GDP data follow figures showing Israel's inflation rate easing to a more than two-year low of 2.6 percent in January. With the economy slowing and inflation back within a 1-3 percent target, that typically would be enough to prompt another rate reduction after a quarter-point cut in January. However, some analysts believe policymakers intend to stay cautious and keep to their main goal of maintaining financial stability.

It next decides on interest rates on Feb. 26.

The economy in the fourth quarter was impacted by a 26.9 percent drop in private spending - the main growth driver - an 18.3 percent fall in exports, and a 67.8 percent slide in investment in fixed assets, especially in residential buildings.

Government spending, mainly on war expenses and compensating businesses and households impacted, jumped 88.1 percent.

The estimated 2 percent overall growth for last year was in line with the latest projections by the Bank of Israel and Finance Ministry. The Bank of Israel foresees 5 percent growth in 2025.

Private spending fell 0.7 percent in 2023, while exports dipped 1.1% and investment in fixed assets slipped 1.9 percent. Government spending rose 8.3 percent last year.

The shekel was 0.6 percent weaker versus the dollar, while the main Tel Aviv 125 share index rose 0.6 percent after the data were announced.

Reuters