Oct 25, 2023 - Economy

Israel's economy and finances face wartime strain

Data: FactSet; Chart: Axios Visuals

Israel's economy, already under strain before the Hamas terror attacks this month, is rapidly shifting to a war footing.

The big picture: Israel is no stranger to conflict. But the expected scale of a war in Gaza — the chance a new front could open, including along the Israeli-Lebanese border — presents a risk to Israel's tech-centric economy, which had become a magnet for foreign investment in recent years.

The latest: Since the Oct. 7 terrorist attack by Hamas, Israel's currency, the shekel, tumbled sharply, likely driven by capital outflows. Its central bank is now pumping billions of dollars into the currency markets to prevent further collapse.

  • Credit ratings agencies Fitch and Moody's both put Israel's government bonds on watch for downgrades.
  • The Bank of Israel reduced its forecast for economic growth this year to 2.3% from 3% on Monday, while raising forecasts for debt and deficits due to military spending and outlays to support the economy more broadly.

Flashback: Even before the attack, the months of mass protests against Prime Minister Benjamin Netanyahu's judicial overhaul — seen as a power grab by critics — had "caused money to move out," Dan Ben-David, an economist at Tel Aviv University, told the New York Times.

  • "Going into this, we already had an economic problem," he said. "And then came the Hamas attack."

Zoom out: For a guide on how the fighting will impact the Israeli economy, just look to history, Bank of Israel governor Amir Yaron said as part of comments on Monday.

  • In times of conflict, demand tends to suffer in sectors such as construction, agriculture and tourism, while business operations are disrupted as workers are called up for military service.
  • Yaron spotlighted a "significant decline" in consumption already visible in credit card transactions since the attack on Oct. 7.

What they're saying: "The economy has recovered relatively swiftly from past episodes of violent conflict and its dynamism benefits from a diversified high-tech sector as the main engine of growth," analysts at Moody's wrote.

  • "However, this conflict is more severe than the episodes of violence in the last few decades. As a result, there is a risk of a diversion of resources, drop in investment and loss of confidence, which would undermine Israel's economic outlook," they added.
  • Fitch analysts noted that an escalation in the conflict, potentially involving the Lebanon-based Hezbollah militant group or its patron Iran, "could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment and thus lead to a large deterioration of Israel's credit metrics."

What to watch: Signs of potential spillover, especially along Israel's northern border with Lebanon, where clashes appear to be escalating.

Go deeper: The war's economic toll on Gaza

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