From inflation to recession, the fallout from the longest and costliest war in the country’s history is mounting.
The duration, scale and intensity of the conflict result in significant economic consequences that are compounded by geopolitical uncertainty and risks. Disruptions due to the security situation penalize employment, production, investment and exports.
In recent weeks, Israelis have discovered a new term widely used in the media: stagflation, a mixture of stagnant growth and inflation. In truth, the term is inappropriate because the Israeli economy is not at a standstill: it is in decline.
Significant impacts
The exorbitant price of this war is weighing down public finances: one year of war cost around 220 billion shekels (55 billion euros), or the equivalent of 12% of Israel’s annual GDP. To cope with this, the defense budget was doubled, money that is sorely lacking in the state’s current civilian spending.
Furthermore, the country suffers from a shortage of labor supply linked to the security situation: the decrease in the civilian active population is notably due to the mobilization by the IDF of numerous reservists, to the displacement of populations close to the borders , the departure of foreign workers and the absence of Palestinian workers. At the height of the war, almost 20% of the country’s active population was not working.
While no sector of activity will emerge unscathed from this conflict, some are hard hit: tourism, agriculture and construction are significantly slowed down, or even stopped, and their restart after the war will be long and costly. Even high technology, the engine of the Israeli economy, is slowing down due to lack of labor and capital.
According to the main economic indicators published by the Institute of Statistics in Jerusalem, the results of this year of war are gloomy: the engines of growth have died down, production is in decline and purchasing power has fallen. makes daily life difficult for many Israelis.
Barometers in the red
After a disastrous fourth quarter of 2023 (domestic product fell by 21% at an annual rate), the slight recovery in GDP in the first quarter of 2024 (+17%) was only temporary. In the second quarter of 2024, the Israeli economy once again fell into recession: with a small 0.7% increase in domestic product, this is a drop of 0.9% in GDP per capita.
Comparing the first half of 2024 to the first half of 2023, it is clear that most current indicators remain well below the pre-war situation: exports fell by 7%, imports by 6% while investments are down 17%; as for household consumption per capita, it is still 2.2% lower than its pre-war level.
A temporary assessment of the twelve months of war suggests a fall of 3% in GDP per capita, a situation that the country has not experienced for twenty years. In other words, the average Israeli has become poorer by 3% since national wealth has contracted by the same amount.
The impoverishment of the Israeli is also perceptible in daily life: the Israeli pays the cost of the war through the deterioration of public services and the rise in prices. On an annual basis, inflation rose to 3.6%, which makes the consumer basket more expensive and pushes down their standard of living.
Resilience put to the test
By financing the war with a disproportionate deficit (more than 8% of GDP), the Israeli government took the risk of seeing the economy lose its pre-war financial stability and which was characterized by moderate external debt. , a balanced budget, a solid currency and diversified external outlets.
Very quickly, the risk of an economic crisis became a reality: investor and business confidence eroded, resulting in a weakening of the shekel accompanied by a flight of brains and capital towards more welcoming horizons. Fearing a risk of financial solvency, the three American rating agencies (Moody’s, Standard and Poor’s, Fitch) have lowered Israel’s credit rating several times during the last twelve months, and they will continue to do so as long as the war continues. will extend.
We know that the Israeli economy is resilient, its ability to overcome shocks is justified by its numerous assets: a specialized workforce, technological know-how, attractiveness for foreign investors, dynamic demographics, etc.
Faced with a long, costly and destructive war, the resilience of the Israeli economy is severely tested; it cannot prevent the country from plunging into recession.
At best, resilience will enable a rapid recovery after the war; provided that the economy does not leave too many feathers in this endless conflict.
T.O.I.
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