Last week, Fitch Ratings downgraded Israel’s credit score from A+ to A. Fitch cited the continued war in Gaza and heightened geopolitical risks as key drivers. The agency also kept Israel’s outlook as “negative”, meaning a further downgrade is possible.
After Hamas’s deadly attack on October 7, Israel’s stock market and currency nosedived. Both have since bounced back. But concerns about the country’s economy persist. Earlier this year, Moody’s and S&P also cut their credit ratings for Israel.
So far, Israel’s war on Gaza has killed more than 40,000 Palestinians and decimated the economy in the besieged Palestinian enclave.
There are signs of a blowback in Israel, too, where consumption, trade and investment have all been curtailed.
Separately, Fitch warned that heightened tensions between Israel and Iran could incur “significant additional military spending” for Israel.
The Bank of Israel has estimated that war-related costs for 2023-2025 could amount to $55.6bn. These funds will likely be secured through a combination of higher borrowing and budget cuts.
The upshot is that combat operations are putting a strain on the economy. On Sunday, Israel’s Central Bureau of Statistics estimated that output grew by 2.5 percent (at an annual rate) in the first half of 2024, down from 4.5 percent in the same period last year.
Slowing growth
Before the outbreak of the war, Israel’s economy was forecast to grow by 3.5 percent last year. In the end, output expanded by just 2 percent. An even sharper drop was avoided thanks to the country’s all-important tech sector, which has been largely unaffected by fighting.
Other parts of the economy have taken a significant hit. In the final quarter of last year and in the weeks after the war began, Israel’s gross domestic product (GDP) shrank by 20.7 percent (in annual terms). The slump was driven by a 27 percent drop in private consumption, a drop in exports and a slash in investment by businesses. Household expenditure snapped back at the start of the year, but has since cooled.
Israel also imposed strict controls on the movement of Palestinian workers, forgoing up to 160,000 workers. To tackle those shortages, Israel has been running recruitment drives in India and Sri Lanka with mixed results. But labour markets remain undersupplied, particularly in the construction and agriculture sectors.
According to the business survey company CofaceBDI, roughly 60,000 Israeli companies will close this year due to manpower shortages, logistics disruptions and subdued business sentiment. Investment plans have, in turn, been delayed.
At the same time, tourist arrivals continue to fall short of pre-October levels.
Meanwhile, the war has triggered a steep rise in government spending. According to Elliot Garside, a Middle East analyst at Oxford Economics, there was a 93 percent increase in military expenditure in the last three months of 2023, compared to the same period in 2022.
“In 2024, monthly data suggests military expenditure will be around double the previous year,” Garside said. Much of that increase will be used on reservist wages, artillery, and interceptors for Israel’s Iron Dome defence system.
Garside told Al Jazeera these expenditures “have mostly been financed by issuance of domestic debt”.
Israel has also received some $14.5bn supplemental funding from the United States this year, on top of the $3bn in annual aid that the US provides to the country.
Garside noted, “We are yet to see any major cutbacks to other parts of the budget [like healthcare and education], although it is likely that cuts will be made in the aftermath of the conflict.”
Absent a full-scale regional war, Oxford Economics anticipates that Israel’s economy will slow to 1.5 percent growth this year. Subdued growth and elevated deficits will put further pressure on Israel’s debt profile, which will likely raise borrowing costs and soften investor confidence.
Bruised public finances
Fitch expects Israel to permanently increase military spending by 1.5 percent of GDP compared to prewar levels, with unavoidable consequences for the public deficit. Last week’s rating report noted that “debt [will] remain above 70 percent of GDP in the medium-term”.
What’s more, the rating agency warned that “the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts”.
Regional conflict
On Monday, US Secretary of State Antony Blinken said that Netanyahu had accepted a “bridging proposal” designed to reach a ceasefire between Israel and Hamas and diffuse growing tensions with Iran.
The following day, eight Palestinians were killed in an Israeli attack on a crowded market in Deir el-Balah, in central Gaza.
Hamas has yet to agree to the bridging proposal, calling it an attempt by the US to buy time “for Israel to continue its genocide”. Instead, the Palestinian group has urged a return to a previous proposal announced by US President Joe Biden, which has more guarantees that a ceasefire would bring about a permanent end to the war.
Netanyahu has insisted that the war will continue until Hamas is totally destroyed, even if a deal is agreed. Israeli officials, including Defence Minister Yoav Gallant, have rubbished the idea of a total victory against Hamas.
A decades-old shadow war between Israel and Iran surfaced in April, when Tehran launched hundreds of drones and missiles at Israel in response to the killing of two commanders from Iran’s Islamic Revolutionary Guard Corps (IRGC) in Damascus.
Along its Lebanese border, Israel has traded near-daily attacks with Hezbollah since last October. The armed group began firing on Israel as a show of solidarity with Hamas. Both organisations have close ties with Iran.
More recently, the assassinations of Hamas leader Ismail Haniyeh in Tehran and Hezbollah military commander Fuad Shukr in Beirut have sparked fears that the conflict in Gaza could metastasise into a regional conflict.
“The human toll [of a wider war] could be significant. There would also be huge economic costs,” says Omer Moav, an Israeli economics professor at the University of Warwick.
“For Israel, a long war would come with high costs and greater deficits,” he said.
In addition to undermining Israel’s debt profile, Moav said that prolonged fighting would incur “other costs”, like labour shortages and infrastructure damage, as well as the possibility of international sanctions against Israel.
“Israel is currently ignoring the fact that economics may lead to greater [societal] damage than war itself,” said Moav. “The government is not behaving responsibly. Does it want to avoid the costs of war, or does continued conflict serve political interests?”
OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.
Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.
The change is scheduled to come into force on Nov. 8.
As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.
The program has also come under fire for allegations of mistreatment of workers.
A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.
In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.
The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.
According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.
The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.
Temporary foreign workers in the agriculture sector are not affected by past rule changes.
This report by The Canadian Press was first published Oct. 21, 2024.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
