From a likely recession to a weakening shekel, here's how the conflict with Hamas is impacting Israel's economy and markets

• The conflict with Hamas that began October 7 will have widespread financial implications for Israel.
• A top Israeli economist said a recession in Israel is likely, and Fitch put the country's credit rating on watch for downgrade.

Tensions in the Middle East have continued to escalate since the Palestinian militant group Hamas killed 1,400 people in its attack on Israel on October 7.

President Joe Biden visited Tel Aviv on Wednesday, Israeli ground troops have started to take positions near the Gaza border, and military strategists have forecasted a looming, extended conflict. Prime Minister Benjamin Netanyahu cautioned on Thursday that the conflict will be a "long war."

Recession risk

The near- and long-term impact on Israel's economy remains in question, especially as more than a quarter-million reservists from Israel's Defense Forces have left their jobs to prepare for war. The majority of them are under 40 years old, and comprise a key demographic in the country's technology sector, which accounts for about a fifth of Israel's gross domestic product.

Economist Joseph Zeira, a former professor at Hebrew University and the author of "The Israeli Economy: A Story of Success and Costs," said the economic impact of something like this is "immediate."

Zeira told told CNBC that a recession appears almost certain as the country gears up for war, tourism drops, and productivity declines as a result of large-scale mobilization.

Credit risk

On Tuesday, Fitch Ratings placed Israel's sovereign debt rating on watch for downgrade, pointing to the potential for the conflict to expand with multiple actors, such as other militant groups and Iran, as well as the risk of large-scale military confrontations.

The consequences of such an escalation, the agency said, could result in a negative ratings action, and a sizable financial drain stemming from higher spending and lower tax collection.

"While not our base case, such large-scale escalation, in addition to human loss, could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment and thus lead to a large deterioration of Israel's credit metrics," Fitch said in a statement.

Currency risk

On October 9, two days after Hamas' initial attack, the Bank of Israel sold off $30 billion in foreign reserves in a bid to prevent its currency from falling against the dollar.

Yet in less than two weeks, Israel's shekel has weakened about 4.8% to hit multi-year lows against the dollar. Traders have been ramping up short bets against the currency to the highest level since January 2022, according to Deutsche Bank.

The central bank, then, is facing the dual pressures of stimulating the economy by slashing interest rates, while also needing to prop up its currency. The Financial Times reported Tuesday that Bank of Israel deputy governor Andrew Abir said policymakers would prioritize stabilizing the currency over growth.

"We need to see a de-escalation in the conflict or a surprise rate hike from the central bank for the currency to rise," currency analyst Lee Hardman of MUFG Bank said, per the FT.