World's Largest Bank Warns of War's Impact on Israeli Economy

SadaNews Economy - It seems that the continuation and expansion of the war have begun to impose an increasing burden on the Israeli economy. After the Israeli government revised the budget project and allocated substantial amounts to finance the war, JPMorgan, the largest bank in the world, took the initiative to adjust its forecasts for the performance of the Israeli economy amid the war's repercussions. The bank published a relatively positive analysis on Friday, March 6, about a week after the outbreak of the war on Iran, regarding the war's impact on the Israeli economy. The report's summary was largely encouraging; it indicated that despite a slight decline in economic activity being expected, the Israeli economy is likely to overcome the effects of the war, and that the overall damage would be less than what was recorded during last year's twelve-day war. However, the report noted that the war has an economic cost, although it is expected that the Israeli economy can bear it. Estimates suggest that the government’s financial deficit this year will rise to around 4.2% of GDP, compared to an expected 3.8% on the eve of the outbreak of the war, an increase of nearly 9 billion shekels. The bank also anticipated a decline in the economic growth rate from approximately 5%, as expected before the war, to about 1%. Nevertheless, the report indicated that this decline might be compensated by strong growth in the second quarter of the year. Overall, the bank's estimates at that time were consistent with the signs of recovery in the Israeli economy that had emerged since the beginning of the current year. However, the bank published a new estimate on Friday, March 13, revising its previous projections, expecting a more serious decline in the performance of the Israeli economy due to the war against Iran and Lebanon. The bank lowered its growth forecast to 4.1% in 2026, compared to 4.8% on the eve of the outbreak of the war. It also expects the first quarter of the year to witness a contraction of 2%, whereas estimates a week prior indicated a growth of 1%, and two weeks prior indicated a growth of 4.5%. The bank attributes this decline in forecasts to the prolongation of the war, Hezbollah’s involvement in the conflict, as well as the anticipated financial deterioration resulting from the significant increase in security costs. Despite expectations for economic activity to return rapidly during the second quarter of 2026, JPMorgan's estimates suggest that there will not be a return to the robust growth trajectory recorded before the outbreak of the war this year. In summary, economists at the world's largest bank present a different, more perilous macroeconomic picture compared to what they offered just one week ago. According to the new estimates, the damage inflicted on economic growth will be greater than the initial projections indicated. Despite this pessimistic outlook, the bank does not present a scenario for an economic crisis; instead, it discusses a scenario of exacerbating conditions. This exacerbation is attributed to several factors, most notably the prolongation of the fighting, as the current confrontation has exceeded last year's war, which lasted for 12 days, as well as the unexpected escalation on the northern front. Initial estimates indicated that the economic damage would be limited due to the decrease in the intensity of direct attacks from Iran; however, the escalation in the confrontation has changed these estimates. The report also points to a potential energy crisis that could be more severe than initially estimated, with expectations that its impact on the global economy will be greater than anticipated. A significant portion of the report is dedicated to analyzing the government's financial situation in light of the amendment of the state budget proposal for 2026 earlier this week. Bank experts highlight several central points regarding the implications of this budget, including its potential impact on monetary policy. According to the report, the financial deficit is expected to rise to about 5.1% of GDP, compared to 3.9% in the original budget proposal, following the addition of approximately 32 billion shekels to the security budget. The report also makes another noteworthy point. Despite the occasional cuts in ministry budgets, which the bank describes as limited, JPMorgan experts believe that non-security (civil) spending will also increase by 12%, a level considered very high by historical standards compared to sustainable growth rates, according to SadaNews economy monitoring. This practically translates into a noticeable increase in the deficit and public debt. JPMorgan experts indicate that the Bank of Israel indirectly hints that the path to reducing interest rates will be much slower. This is attributed to the decreasing margin available to the central bank, amid the government’s clearly expansionary fiscal policy. However, it does not stop there; alongside this imbalanced financial expansion, short-term inflation risks have also intensified due to rising commodity prices and supply chain disruptions. This means there are two factors pushing towards adopting a more cautious and conservative monetary policy. According to the bank's estimates, the Bank of Israel may find itself caught between two opposing forces: on one hand, there is a war negatively affecting economic activity, which may justify lowering interest rates to support the economy; on the other hand, there is an expansionary fiscal policy and increasing inflationary pressures. Thus, the natural inclination to lower interest rates to support the economy is no longer an implicitly understood decision. It is clear that the prolongation of the war and the increase in its financial costs are likely to increase economic damage and complicate the possibilities for economic recovery after the war ends.