Israel’s economy could shrink even more than anticipated, according to the Institute for National Security Studies at Tel Aviv University. Even in less severe scenarios, researchers project a drop in Israel’s gross domestic product (GDP) per capita. The decline comes as Israel’s population grows faster than its economy, leading to lower living standards.
Before the October 7 Israel-Hamas war, the International Monetary Fund had forecasted a 3.4% growth for Israel’s economy this year. However, economists now predict growth rates between 1% and 1.9%. The outlook for next year is also expected to be weaker than previously forecasted.
Despite these challenges, Israel’s central bank cannot lower interest rates to stimulate the economy. Rising inflation, driven by increasing wages and soaring government war spending, ties the hands of policymakers.
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The Bank of Israel estimated in May that war-related costs could total 250 billion shekels ($66 billion) by the end of 2024. This figure includes military expenditures and civilian expenses, such as housing for displaced Israelis. The estimated cost is equivalent to around 12% of Israel’s GDP.
As fighting intensifies, including with Hezbollah in Lebanon, these costs are expected to rise, further delaying the return of displaced Israelis to their homes. Israel launched a ground incursion into southern Lebanon on September 30, escalating defense spending.
Finance Minister Bezalel Smotrich remains optimistic, believing Israel’s economy will recover post-war. However, economists warn that the long-term damage from the conflict could linger far beyond the war’s end.