Israeli economy is growing only weakly - war takes its price!

Israeli economy is growing only weakly - war takes its price!

The Israeli economy showed year-on-year growth of 3.4 percent in the first quarter of 2025, but the figures fell short of expectations. Israel's statistics office has published preliminary data indicating subdued economic development. Economists had forecast a growth rate of 3.5 percent, showing that the ongoing conflict in Gaza is having a negative impact on the economy. These fighting have increased in intensity since October 2023, after an interim ceasefire lasted only a few months. In 2023, economic growth was only 1.8 percent, and in 2024 it fell further to 1.0 percent. The Israeli central bank then lowered its forecast for 2025 from the original 4.0 to 3.5 percent.

A particularly worrying aspect is the five percent decline in private consumer spending in the first quarter of 2025. This development reflects the uncertainties arising from the ongoing conflict. Exports have also fallen by almost two percent, which is putting additional pressure on the economic situation. The repeated drafting of reservists into the army has taken many working people out of the workforce and is contributing to the economic slowdown.

Economic challenges and impacts of the conflict

The war on Palestinian terror, which has been going on for ten and a half months, has had far-reaching effects on Israel's economic growth. In the second quarter of 2024, the economy grew by only 1.2 percent, while experts had forecast growth of 2.5 to 5 percent. Compared to the previous year, gross domestic product (GDP) fell by 1.4 percent, indicating significant economic challenges. In particular, consumer spending rose by 12 percent in the second quarter of 2024, but was unable to reverse the overall negative trend. Goods production also fell by 1.9 percent and exports fell by 8.3 percent.

Another stressful factor is the supply difficulties and evacuations in northern Israel as a result of Hezbollah attacks. In the southern regions, where Hamas murdered 1,200 people on October 7, many businesses remain closed and agriculture has come to a standstill. This has also hit the construction and real estate sector hard, where investment fell by over 25 percent, partly due to a lack of Palestinian workers.

International reactions and economic stability

Ratings agency Fitch has downgraded Israel's credit rating from A+ to A, reflecting uncertainty over the economic situation. The agency takes into account the assumption that the conflict could last into next year, which could lead to infrastructure destruction and increased defense spending. At the same time, the Bank of Israel lowered its growth forecast for 2024 by 0.5 points to 1.5 percent and for 2025 by 0.8 points to 4.2 percent.

Tourism, an important sector for Israel's economy, has suffered massive losses following the October 7 massacres. The number of visitors fell dramatically from 330,900 in September to 98,600 in October and to just 39,000 in November. A slow recovery was observed, but influenced by the ongoing threat of war with Iran. In this context, Israeli airline El Al generated record revenues in the first and second quarters and became a monopolist after foreign competitors suspended their flights.

In summary, it can be said that Israel's economic situation remains critical and the uncertainties caused by the ongoing conflict are weighing heavily on the forecasts for the coming years. Both reports TradingView and Jewish General, highlight the challenges facing the Israeli economy and take a worrying look at the near future.