Israel’s GDP Contracts by Nearly 20% in Q4 2023
An Israeli national flag above produce for sale at Carmel Market in Tel Aviv, Israel, on Nov. 7, 2023.
Israel’s gross domestic product shrank nearly 20% in the fourth quarter of 2023, reflecting the toll of the country’s war against Hamas in Gaza, now in its fifth month. The contraction was significantly larger than anticipated, as analysts had predicted a contraction of around 10%. This unexpected decline indicates a larger impact from the conflict on the economy than initially estimated.
The economic data released on Monday showed that private sector consumption and real estate investments were the primary drivers of the decline. Analysts from Goldman Sachs noted that the contraction occurred despite a strong surge in public sector consumption and a positive net trade contribution, with the decline in imports surpassing the decline in exports.
Private consumption experienced a steep quarter-on-quarter annualized drop of 26.9%, while fixed investment plummeted nearly 68%. The halt in residential construction, caused by a shortage of both Israeli workers due to military mobilization and Palestinian workers who have been mostly barred from entering Israel since October 7, contributed to the decline in fixed investment. Prior to the restrictions, over 150,000 Palestinian workers from the occupied West Bank entered Israel daily for work in sectors such as construction and agriculture.
Analysis by Liam Peach, senior emerging markets economist at London-based Capital Economics, revealed that Israel’s GDP contraction was much worse than expected and highlights the extent of the hit from the Hamas attacks and the war in Gaza. While a recovery is expected in the first quarter of 2024, GDP growth for the entire year is predicted to be one of the weakest on record.
The high-tech sector, a significant contributor to Israel’s economy, has been particularly affected by the mobilization of 300,000 military reservists to deploy in Gaza and on the country’s northern border with Hezbollah in Lebanon. The terror attack of October 7, led by Hamas, triggered the mobilization and resulted in the loss of approximately 1,200 lives in Israel. Israel’s subsequent offensive against Gaza and a relentless bombing campaign have led to the deaths of over 28,000 people in the blockaded territory, according to Gaza’s Hamas-run health ministry.
Implications and Emerging Trends
The significant contraction of Israel’s GDP in the fourth quarter of 2023 raises concerns about the long-term economic implications of the ongoing conflict with Hamas. The war has not only disrupted private consumption and investment but also impacted the country’s high-tech sector. Israel’s economy heavily relies on its innovation and technological advancements, with the high-tech industry contributing significantly to its GDP.
With the prolonged conflict and mobilization of military reservists, the high-tech industry is facing challenges in terms of resource availability and potential delays in projects. This could lead to a slowdown in innovation and technological advancements, affecting Israel’s competitive edge in the global market. To mitigate this risk, it is crucial for the government to ensure the necessary support and resources are provided to the high-tech sector during and after the conflict.
Furthermore, the restrictions on Palestinian workers entering Israel have disrupted the labor market, particularly in sectors such as construction and agriculture. The shortage of both Israeli and Palestinian workers has led to delays in construction projects and reduced output in the agricultural sector. Addressing this issue will require effective coordination between the Israeli government and relevant authorities to ensure a steady and skilled workforce is available once the conflict subsides.
Looking ahead, the extent of the economic recovery will depend on various factors, including the duration of the conflict and the effectiveness of reconstruction efforts in Gaza. Rebuilding the infrastructure and creating a conducive environment for economic growth will be vital for Israel’s long-term prospects. Additionally, initiatives to diversify the economy and reduce its dependence on the high-tech sector should be considered to enhance resilience and mitigate future economic shocks.
- Predictions for the Industry:
- The high-tech sector in Israel will experience a slower pace of growth in the coming years due to the impact of the conflict and resource constraints.
- The government will prioritize investment in infrastructure and reconstruction efforts in Gaza to foster economic recovery and stability in the region.
- Diversification of the Israeli economy will become a key focus, with the aim of reducing dependence on the high-tech sector and enhancing resilience to future shocks.
- International collaboration and partnerships in the high-tech industry will play a crucial role in supporting innovation and driving economic growth.
As Israel navigates the challenges posed by the ongoing conflict and aims to revive its economy, a comprehensive approach involving both short-term measures and long-term strategic planning will be essential. By ensuring the high-tech sector remains resilient, addressing labor market disruptions, and promoting economic diversification, Israel can emerge stronger and more prepared for future uncertainties.
This article is intended for informational purposes only and does not constitute investment advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency or organization.