Despite the ongoing conflict with Hamas in the Gaza Strip and the continual clash with Hezbollah in Lebanon, the Israeli economy has proved to be quite elastic. The pressure from the conflict between Hezbollah and Israel continues to weigh on Lebanon’s economy, which is expected to shrink by up to 5% in 2024. But affected by the longest and costliest war in its history, Israel has been able to come out with 3.8% growth in the GDP in the third quarter of the year.
Though the war remains very costly, the economy remains more robust in Israel said Israel’s Finance Minister Bezalel Smotrich. “The Israeli economy is an economy that is defined as a strong economy that even today facilitates investment." This positive outlook emerged only a day after Israeli strikes attacked Hezbollah’s leader, Hassan Nasrallah, in Beirut in a move that has deepened concerns for wider conflict in the region.
But while the conflict escalates and geopolitics become tenser, a key star performer of the region, Israel, has recorded a 3.8% annualized growth of its third-quarter GDP. This was a great reversal from about six months ago when the fatal attack by Hamas started the turmoil of the war. The IMF had predicted a more modest 3.4% for the year even before the start of the war, but the third quarter’s show suggests that Israel’s economy is on a path of great recovery.
As estimates by the Central Bureau of Statistics show, in the Israeli economy, GDP in the three months to September grew mostly due to an increase in consumption by 8.6%. In addition, there was an increase of 21.8% in investments in fixed assets, especially in construction and in the sub-sector of real estate, which was reviving. On the positive side, exports were up by 1.7%, which is a healthy addition to its overall gross domestic product performance, while government spending, which increased due to the war on the country’s southern neighbor, declined by 10.8% during the year.
Overall, the economy of Israel has been characterized by steady growth; the impact of the war include inflation and an upturn in government borrowing. Inflation was recorded at an average of 3.5% in September— higher than the government's preferred single-digit range of 1-3%. Ministers have blamed the phenomenon on the disruptions of supplies by the ongoing conflicts, mainly in the defense and construction real estate good sub-sectors. This inflation increase, even though it has been gradually declining globally, proves that the war brings about distinctive pressures.
However, to tame the inflation rates, the Israeli central bank, under its governor, Amir Yaron, has not followed the creation of rate cuts as have other central banks worldwide, such as the US and Europe. Yaron has also warned that no more rate cuts are expected soon and that rate hikes could be expected if inflation stays high. The central bank’s decision to retain the current standing rates sends more of a message of a conservative central bank under conditions of geopolitical risks.
As Yaron factually outlined, the financial implication of the war involves impaired solutions to the fiscal deficit, the latter increasing to about 8.5% of GDP by September. The government of Israel has been raising funds for defense and military while other areas like tourism, construction, and others have been suffering a lot courtesy of the conflict. To reduce the deficit, Yaron has proposed changes to the 2025 national budget and cuts and tax increases that amount to 30 billion shekels ($7.9 billion), or 1.5% of Israel’s GDP.
With the ongoing fight against Hamas and Hezbollah, the Israeli officials have long-term economic costs on their minds. Restricting the insight into Israel’s future economy, the conflict might last until February 2025, as Governor Yaron said: “The war has continued for longer than expected,” and “At the moment, our base view and outlook for the war is that it will persist largely to Q1 2025.”
The victory of Donald Trump in the American presidential elections as the 47th President of the United States has brought a new phase in Israel’s era of political and economic developments awaiting its mileage. People in Israel and more specifically inside the shades of the political leadership, especially within the Prime Minister Benjamin Netanyahu coalition, are delighted by the comeback of Trump to office. The view of an administration that is in clear support of Israeli actions has revived the hardliner camp on the matter of territorial claims. While other regional leaders may be wary of political consequences that could result from such a move, Smotrich has eagerly embraced Trump’s election as an opening that allows him to advance Judaization and sovereignty in Judea and Samaria. To his way of thinking, 2025 might be “the year of sovereignty in Judea and Samaria,” with Trump’s promise of support as the wind in his back as the country plows through one of its most challenging financial periods, constantly at war with Gaza with a burgeoning defense budget that is draining the national economy. Israel’s social welfare has an extremely rough year ahead of it, involving steep cuts to social services, an increase in taxes, and a raised deficit. The effects that stem from these measures can lead to negative economic development in the short run and a deterioration in the Israeli economy in the long run. However, Smotrich and other figures within Netanyahu’s coalition are likely to return to the stand on the rationale that the aftermath of the war will see the economy improve as they are focusing on the military outcome and the eventual desire for a new and better order in the Middle East—a goal Trump empowers with his Middle East policies, including the so-called Deal of the Century.
Trump’s unrelenting advocacy for the occupation state’s annexation and territorial aggrandizement has buoyed Smotrich and other such bigots in Netanyahu’s government. When it came to Donald Trump’s first term, there was no stronger ally for Israel, with actions such as the recognition of Jerusalem as Israel’s capital and the Abrahamic Accords. Right-wing leaders in Israel see the second Trump term as a green light to proceed with the annexation further since they know they will have the American blessing—in terms of rhetoric and action. This has given rise to a situation where the Netanyahu-led coalition that premised its campaign on sovereignty and security is implementing policies that are likely to redefine the position of Israel in the Middle East for decades to come.
Still, Smotrich’s vision has its price, and it is found in the overheated conflict between Arabs and Jews. The war and uncertainty have hit the Israeli economy hard; recovery will take a long time. Israel’s credit rating is in trouble as Fitch and Moody drop the country’s bonds, S&P follows, and conflict and debts increase. According to the Bank of Israel, such reductions in investment in non-defense areas may potentially slow the development of the Israeli economy in the following years. The high-tech industry, which is a major source of Israel’s gross domestic product, is felt to be on the receiving end already, with various firms seriously contemplating shifting their establishments to other countries because of both economic instability as well as insecurity. This creates doubts about the applicability of the policies promoted by Smotrich, such as annexation and military domination of Gaza, from the increasing economic pressure point of view.
Israel's economic future is uncertain. As the costs of the war continue to mount and the long-term consequences of Smotrich's policies become apparent, the country will have to balance its military ambitions with the realities of a strained economy. The hope within the coalition is that once the war ends, Israel can turn the page on this tumultuous chapter and begin to capitalize on the opportunities presented by Trump’s re-election. Whether this will pass and Israel’s economic resilience will be enough to weather the coming storm remains to be seen. What is clear, however, is that Trump’s return to the White House has set the stage for a transformative period in Israeli politics, one that could reshape the Middle East and redefine Israel’s role on the global stage.
Edited by: Melisa Altıntaş