(Bloomberg) -- Israel’s central bank chief said he expects the country’s multi-front conflict to continue until early next year, but start to ease within about a month.
“The war has gone on longer than initially anticipated,” Governor Amir Yaron said to Bloomberg Television in Washington. “Our basic forecast and scenario is that the war will continue roughly into the first quarter of 2025 with an intensity sort of like what we’re seeing now for another month or so, and then slowly take a notch down.”
Fighting against Hamas in Gaza and Hezbollah in Lebanon over the past year, as well as high tensions with Iran, have taken a big toll on the Israeli economy. The fiscal deficit has soared as the government increases defense spending and sectors such as construction and tourism slump, while inflation has accelerated beyond the country’s target range and borrowing costs have jumped.
While its unusual for central banks to make forecasts on military matters, Israel’s has been forced to do that given the far-reaching impact of the conflict on the economy and financial system. While figthing against Hamas and Hezbollah remains heavy, Israel’s made strong gains in recent months, leading some analysts to predict the groups’ resistance will soon start to wane.
Yaron, in the US capital for the International Monetary Fund and World Bank annual meetings, said Israel’s $525 billion economy had a good record of rebounding strongly from security crises. Still, today’s is “of a different scope in terms of duration and extent” to Israel’s past military operations, he said.
Earlier this month, the Bank of Israel lowered its projection for economic growth this year to just 0.5% from 1.5%, and for next year to 3.8% from 4.2%.
Israel’s been downgraded several times by ratings companies since Oct. 7, 2023, when Hamas triggered by the war in Gaza by attacking Israeli communities and military bases. Moody’s Ratings has cut it by three levels to Baa1 from A1, though it remains well into investment-grade territory.
Israel’s local-currency bond yields have surged this year. Still, the shekel is stronger against the dollar than it was on the eve of the war.
“When you look at the Israeli economy, it is showing a lot of resiliency,” Yaron said, citing foreign reserves of about $220 billion and still-strong exports of software sold by the country’s world-class start-ups. “Our external position is extremely sound. We are seeing the shekel being volatile but given the scope of events, some people would’ve thought maybe it would be moving even more and that shows a lot of confidence.”
The governor, previously a finance professor at the University of Pennsylvania’s Wharton School, said Israelis were still buying houses in numbers than underscored economic resilience.
He reiterated that Israel’s government, led by Prime Minister Benjamin Netanyahu, needed to adjust fiscal policy to rein in the budget deficit, which stood at around 8.5% of gross domestic product for the 12 months through September.
“This is something that we need to deal with as the cost of the war has gone up,” he said.
Yaron, who under Israeli law is also the government’s chief economic advisor, is urging the cabinet to make adjustments of around 30 billion shekels ($7.9 billion), or 1.5% of GDP, for next year’s budget. That’s needed, he said, to show markets the country is fiscally responsible.
The cabinet is expected to vote on the 2025 budget in a week, the first step before it goes to parliament. An initial proposal outlines mostly taxation increases and some freezing of welfare handouts to help with those adjustments. It is not yet clear whether parliamentarians will agree to the measures.
Structural changes will also be necessary, including the drafting of larger numbers of Jewish orthodox men into the Israeli military, the governor said.
“We will be needing more reserve soldiers and draftees,” he said, highlighting that forcing non-orthodox Israelis to serve longer drafts will cost the economy around 0.5% of GDP a year, or roughly $2.5 billion. “We need to increase participation.”
Jewish orthodox parties are key members of Netanyahu’s right-wing coalition and have threatened to withdraw their support for the upcoming budget if far reaching steps on this matter are taken.
(Updates with more comments, context.)
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