The war between Israel and Hamas will abruptly slow the Israeli economy this year and next and send the nation’s budget deficit soaring as the country ramps up spending to support the military, civilians and businesses during the conflict, the Bank of Israel said on Monday.
Many businesses have been forced to pause activity, and hundreds of thousands of Israeli reservists are now on active duty, while many people are in shelters. If the war stays on Israel’s southern front, economic growth will cool to an annual rate of 2.3 percent this year and 2.8 percent in 2024 from an expected 3 percent growth pace for both years forecast in August, the bank said in a report after its first monetary meeting since the conflict broke out.
“We knew how to recover in difficult times in the past, and I have no doubt that this will be the case this time as well,” the governor of the Bank of Israel, Amir Yaron, said in a news conference in Jerusalem. Even so, he added, “it is clear that a shorter or longer duration, as well as any developments of the war to additional arenas,” would add uncertainty to the economic outlook.
The conflict has dealt a fresh blow to a resilient economy that until recently had been hailed as an entrepreneurial powerhouse. Israel had low debt, a current account surplus and high foreign exchange reserves, although growth had begun to slow amid high interest rates, rising inflation and expectations of a slowdown in the global economy.
In its report, the bank said that Israel’s financial markets were functioning, and that much of the country’s economic activity was continuing “as usual.”
But the shekel, Israel’s currency, which had already been on a downward trend since the start of the year, has slumped even further since the war started, to an eight-year low, prompting the central bank to earmark $30 billion in foreign exchange to support it. The shekel fell an additional 0.1 percent against the U.S. dollar Monday.
Two credit ratings agencies warned last week that Israel’s debt could be downgraded, depending on the severity and length of the conflict. But the central bank said Monday that Israel’s banking system “remains stable and robust.”
The central bank had been facing a quandary: Reduce interest rates to help bolster the wartime economy, or keep them elevated to support the shekel. On Monday, the bank chose the latter: It kept interest rates unchanged, adding that its policy was focused on “stabilizing the markets and reducing uncertainty.”
Israel’s debt as a percentage of the economy is expected to rise sharply, reflecting an increase in spending on defense that includes what the bank said would be financial support “to conduct the war in accordance with the goals defined for it.”
With the economy hit and people called to the fight, tax revenues were expected to decline, the central bank added. Consumer spending was already lower, as was activity in the construction, agriculture and tourism industries, the bank said.
At the same time, the government has pledged to spend more to support people and businesses, including housing evacuees from combat zones. Banks and credit card companies, under the government’s direction, are providing repayment deferrals and other financial aid to help households and companies.
The government will also offer grants and state-backed loans to small and midsize businesses, and is creating a fund to help businesses cover fixed expenses, including employee salaries.
All that was expected to help keep the Israeli economy stable, the bank said. Even so, “the forecast is accompanied by particularly high uncertainty,” it added.