Gaza war hits Israeli economy with 19.4% Q4 drop By Reuters

By Steven Scheer

TEL AVIV (Reuters) -Israelis sharply curtailed spending, travelling 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% in the fourth quarter from the prior three months, the Central Bureau of Statistics said in an initial estimate of gross domestic product (GDP) 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 October 7,” the statistics bureau said.

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

Until Hamas’ Oct. 7 cross-border attack on southern Israel, Israel’s economy was on track for growth of some 3.5% 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% 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% in January. With the economy slowing and inflation back within a 1-3% target, that typically would be enough to prompt another rate reduction after a quarter-point cut in January. But policymakers, some analysts believe, intend to stay cautious and keep to their main goal at the moment 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% drop in private spending – the main growth driver – an 18.3% fall in exports and 67.8% slide in investment in fixed assets, especially in residential building.

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

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

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

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