Israel’s GDP Growth Prospects Dimmed by Ongoing Conflict

The Organisation for Economic Co-operation and Development (OECD) has revised its economic outlook for Israel, indicating a downturn due to ongoing military conflicts. The revised projections suggest Israel’s Gross Domestic Product (GDP) will grow by 2.3% in 2023, a decrease from the previously forecasted 2.9%, and by 1.5% in 2024, down from an earlier estimate of 3.3%. This adjustment comes in the wake of the Bank of Israel’s recent revision of its growth estimates to 2% for both 2023 and 2024.

The OECD attributes this forecasted economic deceleration primarily to a marked decrease in both private consumption and investment. The assumption underlying this projection is that hostilities will predominantly affect the southern regions without leading to wider regional conflict, impacting the economy significantly in the latter part of 2023 and to a lesser degree in the early months of 2024. However, a recovery is anticipated in 2025, with the economy expected to grow at a rate of 4.5%.

Factors contributing to the economic downturn include disruptions to supply chains, a reduced civilian workforce, and declining economic confidence, all of which are expected to adversely affect private consumption and investment. Additionally, the tourism sector is likely to experience a downturn, further affecting the country’s export growth.

As Israel continues its military engagement with Hamas, which initiated hostilities on October 7, leading to significant loss of life and hostage-taking, the economic implications have prompted revisions in growth forecasts by both the Finance Ministry and international credit rating agencies. The conflict’s economic toll, coupled with increased defense and security spending, necessitates fiscal adjustments to mitigate the impact on public finances. The OECD emphasizes the importance of maintaining investment in growth-stimulating areas such as infrastructure and education while calling for labor market and educational reforms to address demographic challenges and labor market disparities.