Israel is grappling with economic challenges in the wake of a prolonged conflict with Hamas that began four months ago. The $500 billion economy, which was initially projected to grow around 3.5% last year, experienced a standstill as the conflict unfolded. Preliminary data for the fourth quarter are expected to reveal a double-digit contraction, reflecting declines in consumer spending, construction, and service exports.
Consumer confidence has hit levels not seen since the 2020 COVID-19 pandemic, leading to a quarter-point reduction in the Bank of Israel rate. However, signs of recovery are emerging, with thousands of reservists returning home and a resurgence in shopping mall and restaurant crowds despite ongoing fighting in Gaza.
“ECONOMY IS RESILIENT”
Bank Leumi chief economist, Gil Bufman, suggests that the economy is making a comeback, citing real-time data such as credit card purchases indicating a resurgence in demand. Despite a projected economic growth of around 2% in 2023, a swift rebound is anticipated in 2025, with growth estimates ranging from 5.5% (Bufman’s forecast) to the central bank’s projection of 5%.
Moody’s recent credit rating downgrade to A2 from A1 reflects elevated political risks and weaker public finances stemming from the conflict. However, it acknowledges that the economy has managed the fallout reasonably well, with indicators pointing towards a rapid rebound. The cautionary note is that should the conflict expand to include Hezbollah in Lebanon, the economic impact could be more widespread and prolonged.
Optimistic Outlook for 2025
Bank of Israel Governor Amir Yaron remains optimistic about the future, highlighting Israel’s strong economic fundamentals, innovation, and technology leadership. Historical precedents, such as rebounds following conflicts with Hamas in 2008, 2012, 2014, and 2021, provide confidence in the resilience of the Israeli economy.
Despite a challenging fourth quarter, growth drivers like rapid population growth, natural gas production, research and development, and a highly skilled workforce position Israel for a robust recovery. The economy’s ability to weather previous conflicts underscores its resilience, and experts anticipate a significant rebound in 2025 if the current conflict remains contained.
