Israel launches Gaza City assault; conflict may cut GDP by 10%, weigh on 2025 growth and energy markets

Escalating military operations in Gaza City are poised to exacerbate economic strains across the Middle East, with ripple effects on global energy markets and investor sentiment. As tensions mount in the region, analysts are closely monitoring how prolonged conflict could disrupt trade routes, inflate commodity prices, and weigh on growth forecasts for 2025 and beyond.

The Economic Toll on Israel and Gaza

The ongoing conflict in Gaza has already inflicted substantial damage on local economies, with estimates suggesting severe contractions in output and infrastructure. According to a Wikipedia entry on the economic impact of the Gaza war, updated as of June 2025, projections indicated that an extended war could cost the Israeli economy over $50 billion, equivalent to nearly 10% of GDP, assuming no broader escalation. This figure, drawn from early Ministry of Finance assessments, underscores the burden of military expenditures and reservist mobilisations. By November 2023, the Bank of Israel had forecasted total war-related costs approaching $53 billion through 2025, factoring in heightened defence spending and reduced tax revenues.

In Gaza, the devastation has been even more profound. Reports from the World Bank and United Nations, cited in various analyses, highlight losses equivalent to multiples of the territory’s pre-conflict economy. Infrastructure destruction, coupled with blockades, has driven unemployment rates above 40% and poverty levels beyond 65%, as noted in historical data from the World Bank. The conflict’s persistence into 2025 has only amplified these challenges, turning what was once a fragile economy into a humanitarian crisis with long-term financial implications.

Broader Regional Implications

Beyond the immediate parties, the assault’s progression could destabilise neighbouring economies. Jordan and Egypt, reliant on tourism and trade with Israel, face potential downturns if border crossings remain disrupted. Historical precedents, such as the 2014 Gaza War, saw temporary spikes in regional uncertainty, leading to capital outflows and delayed investments. Analysts at Brookings, in an October 2023 article, discussed the extreme uncertainty surrounding such conflicts, warning of spillover effects on global growth.

Energy markets stand out as particularly vulnerable. The Middle East’s role in global oil supply means any escalation could prompt precautionary hoarding or supply disruptions. Reuters, in an October 2023 piece, noted that a broader Israel-Gaza war might halt disinflationary trends by driving up energy prices, complicating central banks’ efforts to manage inflation. More recent sentiments from 2025, including a May statement from Bank of Israel Governor Amir Yaron, project that an additional six months of conflict could shave half a percentage point off Israel’s 2025 growth, while elevating debt burdens.

Global Market Repercussions

Financial markets have historically reacted sharply to Middle Eastern geopolitical flares. The initial phases of the 2023 conflict, as reported by Forbes Advisor in October that year, led to higher oil and gold prices, a stronger US dollar, and declines in airline stocks. Extending this into 2025, investors are bracing for similar patterns. Ethical investment frameworks, as discussed in a recent AInvest analysis from August 2025, are prompting divestments from conflict-linked assets, aligning portfolios with human capital considerations.

Currency dynamics could also shift. The Israeli shekel has faced pressures in past escalations, with bond and stock markets experiencing sell-offs. A Reuters report from October 2023 detailed immediate market sinks following attacks, with businesses shuttering and prices sliding. In a 2025 context, posts on social media platform X reflect ongoing concerns, with users highlighting shrinkage in Israel’s economy, mounting debts, and investor flight amid the war’s costs.

From a forecasting perspective, analyst models suggest muted global growth if the conflict persists. The International Monetary Fund and World Bank, in discussions around October 2023 reforms, acknowledged their challenges in addressing such shocks, even as they pushed funding plans for economic resilience. Sentiment from credible sources like Moody’s, which downgraded Israel’s credit rating in response to war-related deficits, indicates a budget shortfall nearing 5% of GDP in 2024, with growth dipping to 0.9%—well below trend.

Sector-Specific Impacts

Certain sectors bear the brunt of these developments. Defence industries may see short-term boosts from increased spending, but broader equities could suffer from risk aversion. The Washington Post, in a December 2023 analysis, explored how mounting war costs influence economies across Israel and Palestine, with implications for the Middle East’s stability.

Tourism, a key driver for Israel, has plummeted, with reservist call-ups straining labour markets. Al Jazeera reported in January 2024 that subsidies for 360,000 mobilised reservists were adding to fiscal pressures. Extending this, a Guardian article from August 2025 warns of Israel’s open-ended control plans potentially leading to perpetual war, imposing huge financial burdens and risking increased civilian casualties.

Commodity traders are eyeing oil benchmarks closely. Historical data shows conflicts in the region correlating with volatility; for instance, the 2023 escalation initially jolted prices upward. Fortune’s October 2023 roundup quoted strategists predicting higher energy costs undermining inflation control efforts.

Investor Strategies Amid Uncertainty

For investors, diversification remains key. Hedging into safe havens like gold or US Treasuries could mitigate risks, while monitoring central bank responses will be crucial. The Bank of Israel’s projections, as of May 2025, emphasise the growth drag from prolonged engagement, suggesting a need for fiscal prudence.

Longer-term, reconstruction efforts post-conflict could spur opportunities in infrastructure and aid-related sectors. However, the Guardian’s August 2025 piece highlights the delusional aspects of indefinite occupation, potentially leading to sustained economic drag.

In summary, the evolving situation in Gaza City underscores the fragility of regional economies to geopolitical shocks. With costs mounting and markets on edge, stakeholders must navigate a landscape where humanitarian crises intersect with financial realities, demanding vigilant analysis and adaptive strategies.

References

• Al Jazeera English. (2024, January). Report on subsidies for Israeli reservists. Retrieved from https://x.com/AJEnglish/status/1751172037656170781
• AInvest. (2025, August). Geopolitical risk and asset allocation: Israel-Gaza conflict escalation. Retrieved from https://ainvest.com/news/geopolitical-risk-asset-allocation-israel-gaza-conflict-escalation-2508
• The Guardian. (2025, August 8). Israel’s open-ended control: Occupation and its economic impact. Retrieved from https://www.theguardian.com/world/2025/aug/08/israel-gaza-open-ended-control-occupation
• Brookings Institution. (2023, October). The Israel and Gaza war: Economic repercussions. Retrieved from https://www.brookings.edu/articles/the-israel-and-gaza-war-economic-repercussions/
• Forbes Advisor. (2023, October). War in Israel shaking financial markets. Retrieved from https://www.forbes.com/advisor/investing/war-in-israel-shaking-financial-markets/
• Fortune. (2023, October 8). Impact of Israel conflict on global markets. Retrieved from https://fortune.com/2023/10/08/attack-on-israel-effect-on-markets-according-to-investors-economists-strategists/
• International Monetary Fund & World Bank. (2023, October). Reforms amid Israel-Gaza war. Retrieved from https://reuters.com/world/imf-world-bank-impotent-israel-gaza-war-shock-reforms-edge-forward-2023-10-16
• Reuters. (2023, October 18). Global markets amid Middle East conflict. Retrieved from https://www.reuters.com/markets/global-markets-middle-east-conflict-2023-10-18/
• Reuters. (2023, October 8). Israel markets decline after Hamas attack. Retrieved from https://www.reuters.com/world/middle-east/israel-markets-sink-businesses-shut-after-hamas-attack-2023-10-08/
• Reuters. (2025, May 27). Bank of Israel: Six months more conflict to weigh on growth. Retrieved from https://www.reuters.com/world/middle-east/six-months-more-war-gaza-further-weigh-growth-israel-central-bank-chief-says-2025-05-27/
• The Washington Post. (2023, December 31). Gaza war costs and economic impact. Retrieved from https://www.washingtonpost.com/world/2023/12/31/gaza-war-costs-israel-economy/
• Wikipedia. (2025, June). Economic impact of the Gaza war. Retrieved from https://en.wikipedia.org/wiki/Economic_impact_of_the_Gaza_war