Israel’s economy slumps in the fourth quarter as war takes a toll | CNN Business

London
CNN
 — 

Israel’s output contracted sharply in the final three months of 2023, falling for the first time in nearly two years, as the war with Hamas takes a heavy toll on the economy.

Gross domestic product (GDP) plunged 19.4% on an annualized basis compared with the July-to-September quarter, when it grew by a revised 1.8%, Israel’s Central Bureau of Statistics said Monday in its initial estimate.

The contraction is the latest piece of bad economic news for Israel, which has been waging a war in Gaza aimed at destroying Hamas after its October 7 attack on the country.

The worse-than-expected decline was driven by a 26.9% drop in private consumption, as confidence plummeted following the attacks and households cut back on spending.

Fixed investment by businesses tumbled 67.8%, “driven by a near-halt in residential building resulting from military call-ups and a reduction in Palestinian workers,” according to Liam Peach, senior emerging markets economist at Capital Economics. Exports declined 18.3.%.

“While a recovery looks set to take hold in (the first quarter), GDP growth over 2024 as a whole now looks likely to post one of its weakest rates on record,” Peach said in a note Monday.

The conflict is expected to cost Israel around 255 billion shekels ($70.3 billion) by the end of 2025, equivalent to around 13% of GDP, according to the Bank of Israel.

In November, the central bank cut its forecast for GDP growth this year to 2%, from an estimate of 3% on the eve of the war.

And earlier this month, Moody’s delivered Israel’s first ever credit rating downgrade, citing elevated political risk and deteriorating public finances stemming from the war.

The ratings agency said Israel’s economy had so far “managed the fallout from the conflict reasonably well,” with some indicators pointing to a “swift rebound over the past three months.”

Still, it placed the country on watch for another downgrade, citing the risk of an escalation in the conflict, including through the involvement of Hezbollah, the Lebanese militant group.

“Under a scenario of outright conflict… the negative economic impact would spread to more sectors and be longer-lasting,” Moody’s said.

In 2023 as a whole, Israel’s economy grew 2%, according to the statistics office.

Ido Soen contributed reporting. This is a developing story and will be updated.