Israel’s economy contracts around 20% after Hamas war outbreak

Israel experienced one of the deepest economic contractions in its history when the war against Hamas erupted, as the hostilities paralyzed businesses, forced people to evacuate their homes and caused the military to call up hundreds of thousands of reservists.
Gross domestic product shrank an annualized 19.4% in the final three months of last year, in seasonally-adjusted terms, according to preliminary figures released on Monday. That was worse than every estimate in a Bloomberg survey of analysts, whose median forecast was for a decline of 10.5%.
The shekel weakened slightly on the news and was trading 0.5% down at 3.626 per dollar at 3:09 p.m. in Tel Aviv, heading for its first drop in four days. Stocks initially pared advances, but soon extended them.
Though the conflict broke the economy’s momentum toward the end of 2023, GDP still expanded 2% in the full year, matching the projection by 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 toll on GDP and captures the extent of the disruption that tore through the $520 billion economy in the aftermath of Hamas’s attacks on Oct. 7. Alongside the call-up of reservists that depleted roughly 8% of the workforce, it led to restrictions comparable to shutdowns imposed during the Covid-19 pandemic, causing a sudden crash in manufacturing, jolting consumption and briefly emptying schools, offices and construction sites.
Economic shockwaves from the war have been far more devastating in Palestinian territories, adding to the dire humanitarian crisis unfolding in Gaza. The International Monetary Fund has said the Mediterranean enclave saw “an almost complete collapse of activity” in the fourth quarter, estimating that cumulative GDP in Gaza and the West Bank plunged 6% in 2023.
Iran-backed Hamas, which is designated a terrorist organization by the US and the European Union, killed 1,200 people and abducted around 250 when its militants broke out of Gaza and rampaged through southern Israel on Oct. 7. Israel’s retaliatory offensive has killed some 29,000 people in Gaza, according to health officials in the Hamas-run territory. Israel has said it will launch a ground offensive on the Gaza city of Rafah unless hostages still held by Hamas are released soon.
Unprecedented measures by Israeli authorities contained the market fallout from the war, with the central bank pledging to sell as much as $30 billion from its reserves to support the local currency.
The war’s inflamed regional tensions and the fallout’s seen US based in Iraq, Syria and Jordan attacked, while the Houthis in Yemen are regularly assaulting ships around the Red Sea. Yet fears of a direct confrontation between Israel and Iran or a full-on war with Hezbollah militants based in Lebanon haven’t materialized. That’s provided some reassurance for investors worried about Israel’s public finances.
Israel’s government was downgraded for the first time ever, by Moody’s Investors Service, this month. That came as it plans to ramp up bond issuance to fund the conflict.
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.”
Consumer confidence rebounded toward the end of 2023 but remains far below its pre-war levels. The Israeli Purchasing Managers’ Index for December improved to 49.2, the best showing in months but still signaling contraction in industrial activity, according to Bank Hapoalim.