The Israeli Finance Ministry has significantly reduced its growth projections for 2024 and 2025, citing the ongoing war with Hamas in Gaza and Hezbollah in Lebanon.

The Treasury’s chief economist now forecasts growth of 0.4% in 2024, down from the previous estimate of 1.1%. For 2025, the growth projection has been lowered to 4.3% from 4.6%. The revision comes as the ministry prepares to launch discussion on Thursday over the 2025 state budget.

The reduction in growth expectations is attributed to the intensification and broadening of the conflict.

“Our forecast in early September was based on a scenario of continued fighting until the first quarter of 2025, without assuming further intensity or expansion to other fronts. This scenario is no longer relevant since the fighting expanded to the northern arena at the end of September,” said the Finance Ministry.

The ministry’s current baseline scenario anticipates intense fighting throughout most of the last quarter of 2024, including increased reserve mobilization, followed by a gradual reduction in reserve call-ups throughout 2025.

This downward revision aligns with the Bank of Israel’s recent adjustment of its growth projections. The central bank now expects 0.5% growth in 2024 and 3.8% in 2025, down from its July estimates of 1.5% and 4.2% respectively.

The economic impact of the conflict is already evident. Beyond the direct costs, in late September rating agency Moody’s downgraded Israel’s credit rating by two notches, citing intensified geopolitical risks. This move placed Israel’s rating at the same level as Spain and Bulgaria, reflecting growing concerns about the country’s economic stability amid the war.

Despite these challenges, the Israeli government is taking steps to address the financial strain. Israeli Finance Minister Bezalel Smotrich recently presented the 2025 state budget proposal, which includes 200 billion shekels ($54 billion) for security and war efforts and 20 billion shekels ($5.4 billion) for public reconstruction. The budget aims for a deficit target of 4% of GDP, necessitating cuts of 35 billion shekels ($9.5 billion).

(JNS)