Israel – This week, the International Monetary Fund painted a bleak picture of the Israeli economy during the current and next years, after recording growth below expectations in 2023, coinciding with the continuation of the genocidal war committed by Tel Aviv in the Gaza Strip and its aggression against Lebanon.
In its quarterly report (World Economic Prospects) issued on Monday, the IMF expects gross domestic product to grow by only 2.7 percent in 2025, which is half less than the previous forecast issued last April.
While the Fund expects the Israeli economy to grow in 2024 by only 0.7 percent this year, compared to 2 percent in 2023, a growth driven by increased government spending on defense and security.
negative growth
However, according to the calculations of the Israeli Ministry of Finance, the growth rates recorded in the period between 2023 and 2025 are negative growth, if the natural increase of population and settlers (per capita GDP) is taken into account.
The zero growth of the Israeli economy, taking into account the natural increase in population and inflation, is approximately 2.9 percent, and any percentages above this fall into the category of real growth in the gross domestic product.
According to Anatolia calculations based on World Bank data, the last time the growth of the Israeli economy reached less than 0.7 percent – with the exception of the year of Corona – was in 2002 when the economy contracted by 0.1 percent, which was the most severe year of the Al-Aqsa Intifada.
Even in the global financial crisis that struck the world in 2008 and its consequences continued until 2010, the Israeli economy recorded its lowest growth rate of 0.9 percent in 2008, according to World Bank data.
In 2020, when the Corona pandemic spread, the Israeli economy contracted by 1.9 percent, before growing strongly in 2021 at 8.6 percent and then to 6.8 percent in 2022, and falling strongly to only 2 percent in 2023.
Longer time
It appears that Israel’s post-war economic recovery will take longer than many Tel Aviv Stock Exchange analysts believe, according to expectations contained in the International Monetary Fund report.
In the IMF’s opinion, if the war ends, the Israeli economy will witness improvement in the coming years, “but it will be slow,” until investors regain confidence in the country as an attractive destination for investment.
Returning to the IMF report data issued last April, it expected Israel’s economy to grow by 1.6 percent during the current year.
But the shock was the extent of the expected decline over the next year, as expectations in the April report amounted to about 5.4 percent, while the Fund expected it to reach 2.7 percent in the report issued last Monday.
With the absence of any horizon for an end to the genocide committed by Israel in the Gaza Strip since October 7, 2023, and its expansion of its aggression against Lebanon since last September 23, more uncertainty surrounds the future of the Israeli economy.
On Monday, Israeli media revealed losses incurred by the economy since the beginning of last September, amounting to 25 billion shekels ($6.8 billion), which means that Israel’s budget is likely to be reconsidered and increased immediately after the holidays end.
According to Yedioth Ahronoth newspaper, until recently, the Israeli army’s daily war expenses amounted to 400 million shekels ($108 million).
However, since expanding operations in Lebanon, costs have risen to now exceed NIS 500 million per day ($135.1 million), with additional increases possible in the near future.
Budget deficit
On October 10, the Ministry of Finance said that the budget deficit in the twelve months ending last September amounted to 8.5 percent, up from 8.3 percent in the twelve months ending the previous August.
The Ministry’s expectations at the beginning of this year were that the deficit in the whole of 2024 would reach about 6.6 percent of the gross domestic product.
The Ministry attributed the increase in the deficit in the gross domestic product “to the escalating war expenses against the Gaza Strip” since October 2023.
Tel Aviv Stock Exchange analysts expect the deficit rate to rise further with the announcement of this October’s data, due to the expansion of the conflict northward into Lebanon against the Lebanese faction movement, and fears that tensions with Iran will turn into a regional war.
Before the expansion of the conflict with the Lebanese faction movement, the Ministry of Finance estimates indicated that the deficit would rise to its peak by September 2024, after which there could be a gradual decline.
According to Anatolia’s calculations, the value of the deficit of 8.5 percent as a percentage of the gross domestic product for the year 2023 is approximately 45 billion US dollars, as the gross domestic product in 2023 reached approximately 530 billion dollars.
Israel has turned more than once to global debt markets to obtain the necessary liquidity to finance war expenses and cover the budget deficit.
Anatolia
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Interview with Dr. Miriam Cohen, Economic Analyst at Tel Aviv University
Interviewer: Thank you for joining us today, Dr. Cohen. The recent International Monetary Fund (IMF) report paints a concerning picture of Israel’s economic future. What are your initial thoughts on the findings?
Dr. Cohen: Thank you for having me. The IMF’s report indeed highlights a grim outlook for Israel’s economy, forecasting a mere 0.7% growth for 2024 and a slight recovery to 2.7% in 2025. These figures are particularly alarming given that they are down significantly from previous projections.
Interviewer: The report attributes this sluggish growth, among other factors, to increased government spending on defense amidst ongoing conflicts. How significant is this influence in your opinion?
Dr. Cohen: It’s quite significant. The Israeli government’s focus on defense spending, driven by the ongoing war, is soaking up funds that could otherwise be used for economic development or social programs. As we see military expenditures rise, we get a short-term boost, but the long-term impact could be detrimental, especially if this leads to structural deficits in other areas of the economy.
Interviewer: You mentioned that, according to the Israeli Ministry of Finance, the growth is even more concerning when factoring in population growth. Can you elaborate on that?
Dr. Cohen: Certainly. When you account for the natural increase in population and other inflation factors, the per capita GDP growth is effectively negative. This means that, while the economy might show nominal growth, the average citizen’s economic situation could actually be deteriorating. This situation mirrors what we saw during previous conflicts, indicating that these socio-economic impacts are long-standing and cyclical.
Interviewer: The report suggests that recovery might take longer than some anticipated. What does this imply for international investment in Israel?
Dr. Cohen: The timeline for recovery is crucial. If investors perceive Israel as unstable or as a risky environment due to ongoing conflict, they may hesitate to invest. The IMF suggests that even post-war, the economic recovery will be slow as confidence needs to be rebuilt. This means we could expect stagnation in foreign direct investment until stability is restored.
Interviewer: Given the stark predictions and the lack of resolution to the current conflicts, what could be the implications for everyday Israelis?
Dr. Cohen: The implications could be severe. As growth stalls and government priorities are dominated by defense spending, we could see deterioration in public services, increased costs of living, and rising unemployment as businesses struggle with an unstable economy. Everyday Israelis may feel the effects through increased taxes, reduced public services, and a general decline in living standards.
Interviewer: Thank you, Dr. Cohen, for your insights. Your analysis helps clarify the connection between economic data and the on-the-ground realities in Israel today.
Dr. Cohen: Thank you for having me. It’s vital we keep discussing these issues as they unfold, as they have profound implications for both the economy and the lives of individuals.
Dr. Cohen: A prolonged recovery suggests that international investors may remain cautious about investing in Israel. Until there is greater stability and predictability in the geopolitical landscape, we could see a hesitance among foreign entities. Investors typically seek stable environments with growth potential, and ongoing conflicts can deter investment, leading to missed opportunities for economic advancement in the long run. If the conflict persists, we may also see a trend where capital is diverted to safer markets.
Interviewer: The budget deficit has also escalated due to increased military spending. How do you see this impacting future economic policies?
Dr. Cohen: The rising budget deficit will likely force the Israeli government to re-evaluate its fiscal policies. We may see cuts to social programs or infrastructural investments in favor of maintaining defense spending. This prioritization can have broad implications, affecting public services and overall economic resilience. Policymakers will need to balance urgent national security concerns with longer-term economic sustainability.
Interviewer: considering the IMF’s projections, do you think there’s any potential for a positive turnaround if the conflict de-escalates?
Dr. Cohen: While the report does point to a potential for improvement post-conflict, the recovery will be slow. The scars of prolonged conflict linger, affecting public morale and investor confidence. A positive turnaround is certainly possible, especially if there are systemic reforms and efforts to rebuild trust. However, it will require concerted efforts from both the government and private sectors to transform the economic landscape and attract investment again.
Interviewer: Thank you, Dr. Cohen, for sharing your insights on this crucial topic.
Dr. Cohen: Thank you for having me. It’s a critical moment for Israel, and understanding these economic implications is essential for informed discussions about the future.
