The Israel-Hamas war—which began on 7 October—is dragging on, with no immediate end in sight. The impact on Gaza has been devastating, though the fallout for Israel and a few other neighbouring economies has also been notable.
Palestinian economy to record steep contraction:
Economic activity in the Gaza Strip has been crippled by the conflict, which is leading to mass internal displacement of citizens, loss of life and destruction of infrastructure; Gaza’s economy is likely to have contracted in 2023 and to continue to shrink this year. The West Bank—though not directly involved in the war—is also suffering from restrictions on movement—a major impediment given that many West Bank residents are employed in Israel.
Israel’s economic outlook deteriorates:
Our panelists expect Israel’s economy to have contracted nearly 16% in seasonally adjusted annualized terms in Q4 2023. The call-up of reservists, restrictions on the entry of Palestinian workers, the closure of educational establishments, weak sentiment, population displacement and collapsing tourist arrivals all hit activity. Our panelists have grown increasingly gloomy on the 2024 outlook too. Back in September, the Consensus was for 3.2% GDP growth this year; now, our Consensus is for mere 2.0% growth, well below the historical average.
Lebanon and Jordan economic forecasts worsen:
Lebanon and Jordan—which both border Israel—are feeling the heat of the conflict via lower tourist arrivals. Lebanon has been particularly affected, given the presence of Hezbollah—a paramilitary group that is allied to Hamas—in the south of the country; in November, air traffic at Lebanon’s international airport fell by double digits. Since October, our panelists have revised down their 2024 GDP growth forecasts by 0.2 and 0.6 percentage points in Jordan and Lebanon respectively.
The evolution of the conflict will be key:
In early January, Israel killed two senior Hezbollah commanders, marking an escalation in tensions between Israel and Hezbollah. If full-blown conflict between Israel and Hezbollah occurs, this would likely decimate Lebanon’s economy, and also cause a deep recession in Israel, as Israel’s government would be forced to mobilize far more troops, disrupting domestic economic activity. However, if the war remains limited to Gaza, its economic impact should gradually dissipate over the course of 2024 as the conflict presumably winds down.
Insight from our analysts:
On a second front in the war, EIU analysts said:
“Amid intensive diplomatic efforts to contain current hostilities—which will face significant obstacles—and prevent the outbreak of war between Israel and Lebanon, we expect the heightened confrontations [between Israel and Hezbollah] to continue. The risk of war is extremely high as Hezbullah seeks to avenge the recent killings and maintain its status as Israel’s main security threat while Israel aims to cajole Hezbullah into withdrawing at least 8 km from their shared border.”
On Lebanon, World Bank analysts said:
“Lebanon is the hardest hit among neighboring countries by the current conflict. Alternative data on scheduled and tracked flights for Lebanon, shows that the ratio of tracked-to-scheduled flights (i.e., a higher ratio implies that a larger number of flights have been completed as planned and, hence, indicates fewer disruptions) dropped precipitously from 98.8 percent on October 7 to 63.3 percent on November 4. While flight activity to Egypt and Jordan was also disrupted, the ratio of tracked-to-scheduled flights was significantly higher than Lebanon’s.”
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