An attempt to intercept resistance missiles in the city of Ashkelon (Reuters)

Ratings agency Moody's has cut its forecast for Israel's economic growth this year, with it likely to shrink by 1.5% next year, with 18% of Israel's workforce absent during the war.

The Times of Israel quoted a report by Moody's that the cost of the war waged by Israel on the Gaza Strip since October 269 is at least one billion shekels ($ <> million) per day, and is expected to have a greater impact on the economy compared to previous conflicts, based on preliminary estimates by the Israeli Ministry of Finance.

Moody's vice president Katherine Mullbronner said the severity of any damage to the economy would depend largely on the length of the military conflict, but also on the long-term prospects of Israel's internal security situation. She added that although uncertainty remains very high, "we believe that the impact on the economy may be more severe, than in previous conflicts."

The total cost of the war is estimated at NIS 150 billion to NIS 200 billion ($40 billion to $54 billion), equivalent to 10 percent of GDP, according to a recent report by the Institute for National Security Studies, cited by Moody's, which last month put the Israeli government's A1 credit ratings under review to downgrade.

Financial burdens

The financial burden of the current war will be very high, according to Moody's, and will include spending billions, mainly on:
– Defense and support for the war effort.
– The wages of hundreds of thousands of reservists.
– Compensation for companies affected by the war.
– Reconstruction and rehabilitation of buildings destroyed by the bombardment of resistance missiles.

Meanwhile, fiscal revenues – mainly tax income – are expected to continue to decline as consumption falls, among other demand factors.

Estimates of the economic impact of the war prompted Moody's to cut its forecast for Israel's economic growth for this year to 2.4 percent from 3 percent previously. In a more pessimistic outlook for 2024, the rating agency said it expects a contraction of around 1.5% followed by ultra-moderate growth in 2025.

Last week, credit rating agency Standard & Poor's predicted that the Israeli economy would shrink by 5% in the fourth quarter of this year, and that it would grow by 1.5% overall in 2023 and 0.5% in 2024, followed by faster growth of 5% in 2025.


Absence of 18% of the workforce

The Israeli economy is facing the displacement of more than 200,<> people from population centers along the southern and northern borders following the "Al-Aqsa Flood" operation launched by the Palestinian resistance led by the Izz al-Din al-Qassam Brigades (the military wing of Hamas) on October <>.

The IDF has called up about 350,<> reservists, disrupting the operations of thousands of companies across the country.

Moody's warned that the absence of 18 percent of the country's workforce — those recruited into the military, those evacuated from their homes near the border, parents caring for children, because schools are only partially functioning — is already putting pressure on manufacturing operations and the technology sector.

Technology Sector

The Israeli economy's dependence on the technology sector has grown dramatically in the past decade and currently contributes about 18% of GDP, compared to 10% in the United States and about 6% in the European Union. About 14% of all employees work in the technology sector.

The Israeli economy depends on high-tech products and exports, which account for about 50 percent of total exports, in addition to taxes imposed on this sector.

"While the high-tech industry is more diverse now, the conflict comes at a difficult time for the high-tech industry globally, and Israel has seen a marked decline in capital flows and fundraising activities this year compared to the previous two years," Müllbronner said.

Budget deficit

Moody's expects the budget deficit to widen to 3% of GDP in 2023 and more than double to about 7% of GDP in 2024.

Israel's fiscal deficit had already widened to 2.6 percent of GDP in October, compared to 1.5 percent the previous month. In 2022, Israel achieved its first budget surplus in 35 years, at 0.6% of GDP.

Since the war began, Israel has been forced to borrow NIS 30 billion ($8 billion), according to Finance Ministry data.

Source: Israeli Press