The war with the Palestinian militant group Hamas is costing Israel at least $269 million a day and is expected to hit the country’s economy harder than previous conflicts, ratings agency Moody’s has said in a report based on Israeli Finance Ministry estimates.
The overall cost of the war could reach as much as 200 billion shekels ($53.5 billion), nearly 10% of GDP, threatening Israel’s economic future, the Moody’s report revealed this week, citing data from Israel’s Institute for National Security Studies (INSS).
“The severity of any damage to the economy will depend – to an important extent – on the length of the military conflict but also on the longer-term prospects for Israel’s domestic security situation,” Moody’s senior VP Kathrin Muehlbronner said.
For Israel, much of the economic shock will come from reduced investments, disruptions in the labor market, and slowing growth of productivity, economists warn.
“While the uncertainty remains very high, we believe that the impact on the economy could be more severe than in earlier episodes of military conflict and violence,” Muehlbronner added.
According to Moody’s, the financial burden for Israel will be much higher than that of previous military operations, such as Protective Edge in 2014, or the Second Lebanon War in 2006, which lasted 34 days and incurred a direct cost of around $2.5 billion, or 1.3% of GDP.
A looming economic downturn prompted Moody’s to revise downwards its growth forecast for the Israeli economy from the 3% previously expected to 2.4% this year. In its pessimistic 2024 outlook, the ratings agency sees GDP contracting by about 1.5%.
The agency, which placed Israel’s A1 credit rating on review for a possible downgrade, also predicted that a prolonged conflict would force the government to spend billions of shekels on defense, including the wages of thousands of drafted reservists. Massive spending will also include funding for compensation for war-affected businesses and the reconstruction of devastated communities.
Meanwhile, state revenues, mainly tax income, will continue to slump as consumption, among other demand factors, is plummeting, with the absence of around 18% of Israel’s workforce during the war.
Israel Headed For Sharp Economic Downturn, Says S&P
Israel’s economy will contract 5% in the fourth quarter of this year amid rising geopolitical and security risks due to the conflict with Palestinian military group Hamas, credit rating agency S&P said in a report this week.
The rating agency cited lower business activity, falling consumer demand, and a “very uncertain” investment environment.
S&P projects an Israeli fiscal deficit of 5.3% of GDP in 2023 and 2024, compared with the agency’s pre-war estimate of 2.3%.
The Israeli government has significantly increased expenses to fund the military and to compensate businesses near the border with Gaza, as well as the families of victims and hostages taken by Hamas. This has led to a record budget deficit, which last month ballooned to $6 billion, a more than sevenfold increase compared to one year ago.
The S&P report comes after the agency downgraded Israel’s credit outlook from ‘stable’ to ‘negative’ last month, just two weeks after the conflict began on October 7. Ratings agencies Moody’s and Fitch have both put Israel on review for a downgrade.
S&P, however, indicated it could restore Israel’s credit outlook to ‘stable’ if the conflict is resolved, as that would mean a reduction in regional security and internal risks.