Standard & Poor’s credit ratings agency expressed cautious expectations regarding the pace of Israel’s economic recovery as its war on the Gaza Strip continues and associated tensions in the north with Hezbollah and in the Red Sea.
Despite the growth in gross domestic product achieved during the first quarter of the year, the international rating agency is still skeptical about the sustainability of this recovery, according to what was reported by the specialized Israeli newspaper Globes.
The agency explained that the estimates of Israel’s gross domestic product in the first quarter, which were issued by the Israeli Central Bureau of Statistics on May 16, were largely consistent with our latest economic forecasts.
She added, “We maintain our expectations, which are lower than the consensus, that real economic growth in Israel will be 0.5% in 2024 and will accelerate to 5% in 2025,” conditioning the stabilization of the geopolitical situation and the recovery of exports and investment activities.
The agency considered that the expected recovery in Israel’s economy only partially compensates for the sharp annual decline of 21% in gross domestic product witnessed in the fourth quarter of 2023 after the outbreak of the war in the Gaza Strip.
High risk to credit rating
The rating agency also highlighted several risks threatening Israel’s credit file, pointing to the possibility of escalation with Hezbollah on Israel’s northern border and deteriorating relations with key international allies.
These factors could weaken Israel’s economic recovery and weaken investor confidence.
In addition, recent political developments – including requests for arrest warrants against Prime Minister Benjamin Netanyahu and Defense Minister Yoav Galant by the International Criminal Court – add to the uncertainty facing the country.
Government spending as an engine of growth
The increase in GDP in the first quarter was significantly influenced by increased government spending, which rose by 4.6%, according to Globes.
This increase in domestic consumption exceeded the levels witnessed by the economy in the fourth quarter of 2023, but private consumption is still below pre-war levels in real terms.
In contrast, exports contracted by 2.9% after a sharp decline of 5.9% in the previous quarter, mainly affected by the decline in the tourism and industrial sectors.
Expectations compared to previous recovery periods
Standard & Poor’s analysts noted that, unlike Israel’s rapid economic recovery in the wake of previous tensions and the Covid-19 pandemic, current conditions are unlikely to allow for a rapid recovery.
Unresolved issues in the tourism, construction and agricultural sectors, along with regional security threats and domestic political uncertainty, are expected to limit economic growth.
“We expect these factors to constrain a faster recovery this year,” S&P said.
Declining credit rating
A month ago, Standard & Poor’s lowered Israel’s credit rating from “AA-” to “A+” and maintained a “negative” outlook. This amendment brought the agency’s rating in line with Moody’s, which also lowered its rating for Israel earlier in the year. This reflects the increasing financial and geopolitical risks it faces.