When the war against Hamas broke out, Israel witnessed one of its worst economic contractions in history, as hostilities stopped companies, forced people to flee their homes, and prompted the military to call up hundreds of thousands of reservists.
According to preliminary estimates released on Monday, gross domestic product fell by an annualized 19.4% in the final three months of last year, seasonally adjusted. This was worse than every estimate in a Bloomberg survey of analysts, with a median loss of 10.5%.
The shekel fell slightly on the news, trading 0.5% down at 3.626 per dollar at 3:09 p.m. in Tel Aviv, marking its first decline in four days. Stocks initially reduced gains but quickly extended them.
Though the dispute broke the economy’s momentum toward the end of 2023, GDP still rose by 2% in the full year, matching the central bank’s research department. The Bank of Israel’s growth estimate for 2024 is the same at 2%, while the Finance Ministry sees it at 1.6%.
The assessment is the first official tally of the war’s GDP toll. It illustrates the scope of the disruption that wreaked havoc on the $520 billion economy following Hamas’ attacks on October 7. Along with the call-up of reservists, which reduced the workforce by about 8%, it resulted in limitations similar to those enforced during the COVID-19 outbreak, producing a sharp drop in manufacturing, jolting consumption, and briefly emptying schools, workplaces, and construction sites.
Economic shockwaves from the war have been even more destructive in Palestinian territory, exacerbating the catastrophic humanitarian crisis emerging in Gaza. The International Monetary Fund has stated that the Mediterranean enclave had “an almost complete collapse of activity” in the fourth quarter, estimating that cumulative GDP in Gaza and the West Bank plunged 6% in 2023.
Hamas militants’ attack kills 1,200 in southern Israel; Israeli response claims 29,000 lives in Gaza
Iran-backed When Hamas militants burst out of Gaza and rampaged through southern Israel on Oct. 7, they killed 1,200 people and abducted approximately 250 more. According to health officials in the Hamas-run Gaza Strip, Israel’s retaliatory offensive has killed about 29,000 Palestinians. Israel has threatened to launch a ground offensive on the Gaza city of Rafah unless Hamas’ hostages are released shortly.
Israeli officials took unprecedented measures to control the market impact of the battle, with the central bank promising to sell up to $30 billion from its reserves to bolster the local currency.
The battle has heightened regional tensions, and the impact has seen US bases in Iraq, Syria, and Jordan attacked, while the Houthis in Yemen regularly attack ships in the Red Sea. However, fears of a direct clash between Israel and Iran or a full-fledged battle with Hezbollah fighters headquartered in Lebanon have not materialized. That has provided some confidence to investors concerned about Israel’s national finances.
Even so, signs of stabilization have emerged. The central bank’s composite state of the economy index grew in December for the first time since August, reflecting what it said was a “gradual recovery.”
Moody’s Investors Service downgraded Israel’s government for the first time in history this month. This came as it prepared to increase bond issuance to fund the battle.
Consumer confidence recovered around the end of 2023, but it remains well below pre-war levels. The Israeli Purchasing Managers’ Index for December increased to 49.2, the highest showing in months, but it still signaled a contraction in industrial activity, according to Bank Hapoalim.