Israel's economy lost about 14 billion shekels ($3.75 billion) since the military conflict with Hezbollah in Lebanon escalated over the past month, the Finance Ministry said on Tuesday.
In an updated forecast, the ministry's economists estimated growth of 0.4% in 2024, down from a prior forecast of 1.1% and well below a projected 1.9% in May.
"This scenario is no longer relevant since the fighting expanded starting at the end of September to the northern arena," the ministry said in a report.
Since its last estimate in September, the geopolitical situation changed drastically - the fighting against Palestinian armed group Hamas in Gaza became less intense but intensified in Lebanon as Israel responded to Hezbollah rockets with airstrikes and a ground incursion.
That required a large call up of more army reservists, while Hezbollah rocket fire into Israel sent citizens into shelters, hurting the economy by 0.7 percentage point, the ministry said.
It previously had believed that intense fighting would continue through the first quarter of 2025 but its latest forecast expects the worst of the fighting to end in 2024.
Growth, it said, looks to be 4.3% in 2025 - down from a prior 4.6% - as the economy starts to rebound.
Should fighting continue into 2025 and the return of the economy to normal is delayed, growth this year would be 0.2% and 3.4% next year, the ministry said.
The Bank of Israel earlier this month trimmed its 2024 economic growth estimate to 0.5% from 1.5% and foresees 2025 growth of 3.8% in 2025.
With Israel's population growth at least 1.6% a year, the economy is likely to contract this year on a per capita basis.
Growth was just 0.3% in the second quarter but despite the weakness Bank of Israel policymakers have no intention of lowering interest rates, but rather have warned of rate increases should inflation stay high.
