Israeli economy shows post-Oct 7 recovery, challenges remain

The Bank of Israel Governor, Amir Yaron, announced last week at the Jerusalem Post Annual New York Conference that the Israeli economy has recovered faster than expected following the Oct. 7 attack shock but stressed that challenges remain. 

“We entered this crisis strong and we’re climbing back, but resilience alone won’t solve the long-term challenges,” Yaron stated. “We didn’t defend a particular rate, only market functioning,” he added. 

Yaron noted that prior to the Hamas attack on the Jewish state, the Israeli economy was “a poster child” with a low debt-to-GDP, record-low unemployment and low and well-managed inflation. 

In addition to the massacre of 1,200 Israelis and kidnapping of 251 people, the Hamas aggression also led to a 21% annualized output drop in the Israeli economy during the fourth quarter of 2023. However, the Israeli economy proved to be resilient and rebounded 17% already during the first quarter of 2024.

Furthermore, fresh data reveals that the Israeli economy has reportedly returned to its long-run growth potential of around 3.4 percent growth per year. This annual growth rate is higher than in most advanced OECD countries. 

While painting a cautiously optimistic view of the future, Yaron warned that the Israeli economy still faces multiple challenges. 

In February 2024, the international credit company Moody’s downgraded Israel’s credit rating for the first time due to the war-linked economic crisis in the country. During the past year, other credit institutes followed suit and downgraded Israel’s credit rating amid the war. 

The Bank of Israel governor expressed concerns that expanding military expenses could potentially undermine the Israeli economy’s long-term growth. 

Last June, Yaron estimated that the Gaza War could cost $67 billion in military and civilian expenses during the period 2023 to 2025. This would make it by far the most expensive war in modern Israeli history. By comparison, Israel’s annual Gross Domestic Product stands at around 500 billion dollars. At the time, he urged the Israeli government to balance Israel’s security needs with a budget discipline. 

“The government needs to make sure that it makes the right balances and budget adjustments in light of growing permanent security expenses.” 

The bank governor also assessed that sticky inflation and labor shortages could also impact the Israeli economy’s future growth potential. 

Yaron also addressed the state of the critical tech sector, which constitutes Israel’s economic growth engine and contributes toward 50% of the country’s total export. “In spite of everything going on, the money for early-stage companies is flowing again,” he assessed.

Known internationally as the start-up nation, Israel has in recent years emerged as one of the leading tech centers in the world outside Silicon Valley, California. 

The bank governor also emphasized the need for continued integration of Israeli Arab women and ultra-Orthodox Jewish men into the Israeli workforce. Both groups are currently underrepresented in the modern Israeli economy. 

“Scout Israel, put in the time, and you’ll find the right opportunity. Just make sure we’re also laying the tracks so that the train can keep on moving,” he concluded.