Israeli economy signals recovery, grows by annualized rate of 3.8% in 3rd quarter despite multi-front war

Israel has faced numerous financial challenges amid the ongoing multi-front war with Iran and its terror proxies Hamas and Palestinian Islamic Jihad (PIJ) in Gaza, Hezbollah forces in Lebanon and Houthi rebels in Yemen.

However, the Israeli economy, which appears to be gradually recovering from the initial war shock, grew by an annualized rate of 3.8% in the third quarter between July and September, according to initial estimates from the Israeli Central Bureau of Statistics (CBS). This marks a significant improvement compared to the mere 0.3% growth recorded in the second quarter.

The CBS figures, released on Sunday, indicate that the third-quarter growth outpaced the 2.9% predicted in a Reuters poll. During this period, Israel's GDP per capita rose by 2.6%.

The growth was largely driven by an 8.6% increase in consumer spending and a substantial 21.8% rise in investments in fixed assets, such as residential homes – often a key indicator of economic recovery.

In addition, Israeli exports grew modestly by 1.7%, helping to offset a 10.8% decline in government spending during the same quarter.

Despite signs of recovery, the ongoing war has nevertheless had a dramatic impact on the Israeli economy.

Bank of Israel Governor Amir Yaron estimated in June that the Gaza War could end up costing the Israeli economy some $67 billion during the period 2023 to 2025. If realized, it would make the conflict the most expensive war in modern Israeli history.

Since the conflict in Gaza began in October 2023, Israel has expanded the war with ongoing ground operations against Hezbollah forces in southern Lebanon to secure the return of approximately 60,000 Israelis who have been displaced from their homes in northern Israel due to Hezbollah rocket and missile attacks.

In early October, S&P Global announced that it had downgraded Israel’s credit rating from A+ to A due to the escalating conflict with the Hezbollah terrorist organization.

“We see an increasing likelihood that Israel’s conflict with Hezbollah, given the recent escalation of fighting, becomes more protracted and intensifies, posing security risks for Israel,” S&P announced.

“The company believes that the fighting in Gaza and the escalation in fighting on the northern border, with the possibility of a ground operation in Lebanon, might continue into 2025 with a risk of a response against the State of Israel,” the statement added.

However, Israel Defense Forces has delivered severe blows to Hezbollah, eliminating most of the terrorist group's top leadership and rocket arsenal.

While visiting Israel on Thursday, the Biden administration's special envoy Amos Hochstein indicated that a potential ceasefire between Israel and Hezbollah could be reached within days.

A ceasefire would likely have a positive impact on the Israeli and regional economies.

The Tel Aviv Stock Exchange has been resilient amid the ongoing war and continues to attract funds from international investors. Data released in October revealed that the Tel Aviv Stock Exchange 35 Index, expanded by 14% since the war began on Oct. 7, 2023, when Hamas terrorists invaded Israel and massacred 1,200 Israelis and abducted 251 individuals into Gaza, both living and deceased.