Israel’s war in Gaza has taken a toll on the country’s economy. According to the Central Bureau of Statistics, in the fourth quarter of 2023, the Israeli economy contracted by almost 20% compared to the previous quarter.
The drops were predictable, given the war that broke out after the terrorist attacks on 7 October, but they were higher than forecast. A November report had forecast an annual GDP growth rate of 2.3%, according to a forecast from the Organization for Economic Co-operation and Development. Israel’s actual GDP growth rate was 2.0% for 2023. That number was still lower than estimates and the pre-October 7 trajectory, which had annual growth on track to reach 3.5% .
The decline in Israel’s GDP highlights the lasting effects of Hamas attacks and the ongoing war in Gaza. A recovery is expected this quarter and throughout 2024, although given the uncertain length of the war, these figures may be subject to further changes, which could have ripple effects across the Middle East and global economy.
The worse-than-expected results were driven primarily by two sectors that were heavily affected by the war: consumer spending and real estate investment. Private consumption fell by 26.9% in the quarter.
Immediately after October 7, much of Israel closed down for security reasons. Many businesses have since reopened, but consumer confidence remains low, meaning families are spending less. In November, consumer confidence in Israel plummeted as the threat of further attacks by Hamas remained high. From October to November, Israel experienced the largest monthly decline in consumer confidence of any country in the world, according to market research firm Ipsos.
Israeli spending has also been hurt as thousands of families have been displaced from border towns near Gaza and in northern Israel near the Lebanese border. It remains to be seen whether these Israelis will return to their homes. Meanwhile, their precarious living conditions have reduced their discretionary spending.
In the real estate market, investment fell sharply after the war stumbled the real estate market in late 2023. At the start of the war in early October, some analysts expected Israel’s real estate sector to struggle more expected. has had during the COVID lockdowns. The declines in real estate investment mirror those across the economy as a whole, where fixed income investment fell 68% in the quarter.
The Israeli economy also faces a struggling job market. Since the start of the war, the Israel Defense Forces have called up approximately 400,000 reservists for military service, diverting their efforts from the workforce to the front lines of the war. While many Palestinians, especially from the West Bank, have had their work permits suspended, putting a strain on the construction and agriculture sectors. The Israeli agricultural sector also has many foreign workers, especially Thais, almost all of whom have returned home since the start of the war. According to government estimates, around 10,000 workers had left Israel by the end of November.
Much of the economic slowdown is expected to reverse this year and in 2025. In 2024, Israel’s economy is expected to grow by up to 2%. Once the war subsides, the Israeli government expects a full economic recovery. Before October 7, Israel’s economy was healthy, supported by its resilient, world-class technology sector.