Israel’s economy, expected to recover after the return of many workers from military service, is still struggling. GDP growth for Q2 2024 came in at only 0.7%—well below expectations. This downturn is largely driven by ongoing challenges stemming from the conflict with Hamas, which has significantly increased defense spending and dampened economic activity. Exports and investments have particularly suffered, contributing to Israel’s poor performance among OECD nations.
To manage the economic strain, Finance Minister Bezalel Smotrich sought approval for an emergency deficit increase on September 16, 2024. This was his second request this year, as the war has forced the government to seek additional funding to cover unforeseen expenses. Smotrich has also unveiled plans for the 2025 budget, aiming to maintain a 4% deficit target through significant fiscal adjustments, including freezing wages and cutting public spending by around $9.5 billion.
Despite these measures, economists and credit rating agencies remain concerned about Israel’s long-term economic outlook, especially with Moody’s downgrading Israel’s credit rating, citing a lack of an exit strategy from the ongoing conflict and slowing recovery prospects. The finance ministry projects growth of just 1.9% for 2024, although independent analysts forecast an even lower rate.
Meanwhile, Smotrich’s attempts to maintain fiscal discipline by avoiding excessive deficit increases are being closely watched by international financial markets and credit rating agencies. Credit agencies like Moody’s have already downgraded Israel’s credit rating twice this year, reflecting concerns over the country’s economic trajectory and the long-term impact of the war. The downgrades further strain investor confidence, which is vital for Israel’s economic recovery. Despite the government’s efforts to project stability, the shekel has weakened, and market volatility continues to pose a significant challenge.
