The war harmed Israel's economic activity significantly, primarily because of supply issues, the foremost of which was a lack of workers, the Bank of Israel said in its report on 2024.
The central bank highlighted that gross domestic product went up by just 0.9% when compared to 2023, and productivity in the business sector shrank by 0.8%.
The labor supply increased over the course of the year but did not recover, mainly because of the fact that Palestinian workers were not allowed entry into Israel and because many Israelis were missing from workplaces, either due to IDF reserve duty or because they were evacuated.
The prohibition on Palestinian workers entering the country led to a 3.4% decrease in labor supply in the business sector, with reserve duty leading to another 1.5% decrease.
In spite of partial recovery over the course of the year as the intensity of fighting went down, GDP, and most of the metrics that make it up, were lower than before the war, the bank added.
Yearly inflation stood at 3.2%, slightly higher than in 2023, the bank said, highlighting that this is in contrast to the global trend of moderating inflation.
Increased geopolitical risk
The war caused the risk premium in the economy to increase at the beginning of the war, and it moderately increased additionally over the course of the year due to increased geopolitical risk.
The bank highlighted that this premium decreased (although it remained higher than before the war) toward the end of the year as security risk decreased and the ceasefire in the North came into effect.
The bank also highlighted that additional positive fiscal trends were apparent in this period, including decreased returns on government bonds and the shekel strengthening.
These positive developments were also supported by fiscal moves approved by the government at the end of 2024 to reduce the deficit, the bank said.
The deficit for 2024 stood at 6.8% of GDP, slightly higher than what was expected after the March update of the 2024 budget, the bank said. The debt-to-GDP ratio stood at 67.8% at the end of 2024 – a sharp increase from 61.5% at the end of 2023.
In spite of steps taken to contend with the increased debt, the government's structural deficit stood at 3.6% – higher than what it must be to lower the debt-to-GDP ratio (around 3%), the bank said, adding that this is because the government increased its permanent expenses along with medium term war expaneses.
Increased security expenses reversed a trend that had allowed in the previous two decades for increased civil expenditure without tax increases, the bank said.
A clear plan to decrease the debt-to-GDP ratio over time is necessary, the bank stressed.
When it came to fiscal policy in 2024, the government's central dilemma was balancing the immediate needs of the war with staying on a sustainable fiscal path, the bank highlighted, adding that this meant that the government funded the war's costs by increasing public debt and taking restraining steps in the 2025 budget.
