Israel’s Economy Is Paying A High Price For Its Widening War

In late September, as Israel’s nearly year-long war widened and its credit rating was downgraded again, the country’s finance minister, Bezalel Smotrich, stated that while Israel’s economy was under strain, it remained resilient, Hannah Ziady reported for CNN.

The war has worsened the situation in Gaza, pushing it further into an economic and humanitarian crisis, and the West Bank is “undergoing a rapid and alarming economic decline.”

“Israel’s economy bears the burden of the longest and most expensive war in the country’s history,” Smotrich said on September 28, a day after Israeli airstrikes killed Hezbollah’s leader, Hassan Nasrallah, in Lebanon’s capital, Beirut.

“The Israeli economy is a strong economy that even today attracts investments.” Almost a year after Hamas’ deadly attack on October 7, Israel is pushing forward on multiple fronts: launching a ground incursion against Hezbollah in Lebanon, carrying out airstrikes in Gaza and Beirut, and threatening retaliation for Iran’s ballistic missile attack earlier this week.

“If recent escalations turn into a longer and more intense war, this will take a heavier toll on economic activity and growth (in Israel),” Karnit Flug, a former governor of Israel’s central bank, told CNN.

The war has worsened the situation in Gaza, pushing it further into an economic and humanitarian crisis, and the West Bank is “undergoing a rapid and alarming economic decline,” according to a UN report last month.

The Lebanese economy could contract by up to 5% this year due to cross-border attacks between Hezbollah and Israel, said BMI, a market research firm owned by Fitch Solutions.

Israel’s economy could shrink even more, according to the Institute for National Security Studies at Tel Aviv University.

Researchers also foresee Israel’s gross domestic product (GDP) per capita—which in recent years overtook that of the United Kingdom—falling this year, as Israel’s population grows faster than the economy and living standards decline.

Before the October 7 attack and the ensuing Israel-Hamas war, the International Monetary Fund (IMF) forecasted that Israel’s economy would grow by 3.4% this year. Now, economists’ projections range from 1% to 1.9%. Growth next year is also expected to be weaker than earlier forecasts.