Tuesday 24 December 2024
Last update on Tuesday, December 24, 2024 At 1:56 PM
After a year of war, the fundamentals of the Israeli economy remain solid. The stability of the financial system has been tested and proven. The Jewish state has deployed a combination of expansionary fiscal policy, facilitated by a low pre-war debt level, and a long-restrictive monetary policy to combat inflation and support damaged economic activity.
However, uncertainty is delaying the return of economic activity to pre-war levels.
Activity is below pre-war levels, mainly due to supply-side factors, such as labor shortages caused by the absence of Palestinian workers and economic damage to businesses in the north and south.
While the construction, agriculture and tourism sectors were severely affected, the economy continued to function almost unhindered, including in the trade, services and industry sectors.
This relative stability was achieved largely thanks to the significant aid provided by the government to households and businesses affected by the war.
Economic indicators for the 3rd quarter of 2024 point to a moderate improvement in activity (+3.8% y/y), thanks to an increase in exports of goods, tax revenues and consumption (+8.6% y/y), particularly private consumption (50% of GDP).
However, the growth forecasts of the Bank of Israel and the IMF for 2024 have been reduced to 0.5% and 0.7%, which compared to the natural balance (+2%) means a decrease in GDP per capita.
Inflationary pressures are contained by a restrictive monetary policy. Over the past 12 months, inflation has reached 3.5% and is above the Central Bank’s target range (1-3%).
The Central Bureau of Statistics (CBS) consumer price index shows a 4.3% increase in food prices since October 2023 and in particular 12.2% for fruits and vegetables alone, mainly from the Gaza envelope. On the real estate market, housing prices have increased sharply (+7% since the beginning of the year).
The Central Bank is pursuing a restrictive monetary policy that is intended to be prudent; on November 25, it decided to maintain the key rate at 4.5% for the 7th consecutive time to stabilize the markets.
War-related spending has widened the deficit but debt remains sustainable. The deficit/GDP ratio stands at -7.7% of GDP in November y/y.
The stock of public debt increased to 68% of GDP in 2024. This level is considered sustainable by the government, which had room for maneuver by benefiting from a low level of pre-war debt (OECD average at 78%).
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