This report does not constitute a rating action.
LONDON (S&P Global Ratings) May 20, 2024--An estimate of Israel's first-quarter GDP released by the Central Bureau of Statistics (CBS) on May 16 was broadly in line with our latest economic projection (see our full analysis on Israel, published May 13, 2024, on RatingsDirect). We maintain our below-consensus forecast that Israel's real economic growth will be 0.5% in full-year 2024, accelerating to 5.0% in 2025 as the geopolitical situation stabilizes and exports and investment activities recover.
We expect the initial economic rebound in the first quarter will be followed by a more moderate increase through the rest of 2024. According to CBS estimates, Israel's GDP increased by 3.3% quarter over quarter, compared with our expectation of 3.0%. The growth followed a war-induced contraction of almost 6.0% in October-December 2023.
Domestic consumption increased significantly by 4.6% in the first quarter of 2024, already exceeding the levels of the fourth quarter of 2023. However, the increase was predominantly driven by higher government spending, with private consumption remaining below pre-war levels in real terms. Exports contracted further by 2.9%, following a sharp decline of 5.9% in the fourth quarter of 2023. This mainly resulted from a continued decline in tourism and a contraction in the export of industrial goods.
Over the past 20 years, only the COVID-19 pandemic in 2020 led to a decrease in economic output that was comparable with the drop at the end of 2023. Nevertheless, after the COVID pandemic, Israel's economic output recovered from the hit within one quarter, while other shocks before--including the war in Gaza in 2014, operations in Gaza in 2012, and the 2006 Lebanon war--led to a significantly less pronounced impact on output and were also followed by a quick recovery.
This time, however, Israel's output has remained notably below the pre-war level in the first quarter of 2024, even more so if government security-related spending is excluded (see chart). We expect the lingering issues in the impacted tourism, construction, and agriculture sectors, alongside elevated regional security and domestic political uncertainty, will constrain a faster recovery this year and we continue to expect GDP growth of 0.5% in full-year 2024.
More broadly, we consider that risks to Israel's credit profile remain elevated. In addition to the possibility of an escalation--for example in the case of further episodes of direct confrontation with Iran or a more persistent and direct conflict with Hezbollah along Israel's northern border--we also view the deteriorating relationship between Israel and its closest allies as a risk that could impair Israel's economic rebound and investor confidence.
On May 20, the prosecutor of the International Criminal Court announced the filing of applications for warrants of arrest against five people, including Israel's prime minister and defense minister, over the situation in Palestine. The domestic political landscape also remains uncertain, with the leader of the National Unity party, Benny Gantz, having earlier threatened to leave the war cabinet unless Prime Minister Benjamin Netanyahu unveils a clear post-war plan for Gaza.
In our base-case ratings scenario for Israel, we continue to assume that the war with Hamas and exchange of fire with Hezbollah will persist throughout 2024, but that the conflict will not widen across the Middle East; significant, direct confrontations with Iran will not continue; and that the tensions in the West Bank will not escalate.
Related Research
- Israel, May 13, 2024
| Primary Credit Analyst: | Maxim Rybnikov, London + 44 7824 478 225; maxim.rybnikov@spglobal.com |
| Secondary Contacts: | Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com |
| Carl Sacklen, London; carl.sacklen@spglobal.com |
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