After a sharp decline in private consumption by Israelis in the first months after the October 7 attack, it has recently appeared as if consumption has almost returned to normal. In the first quarter of this year, consumption increased by 6%, after declining by 7.5% in the last quarter of 2023.
State revenue figures also indicate the strength of the economy. In May, state revenues were 2% higher than they were in May 2023, and so far the year’s revenues have exceeded the Finance Ministry’s projections in the March budget.
From February to April, credit card purchases rose 4.7%.
But many analysts fear that the picture will change soon. Bank Leumi estimates that demand in Israel will continue to moderate. “We assume that the negative background factors currently affecting private consumption will continue to suppress inflation,” says Alun Cole Kress, an economist at the bank. “Among these factors is the only partial recovery of economic activity from the effects of the crisis.” War, low consumer confidence, relatively high interest rates, and the expectation of much higher tax rates at the beginning of 2025.
Bank Leumi estimates that the annual inflation rate will fall to 2.5% by the end of the year.
Postpone purchases
One of the reasons for the decline in consumption is the monetary policy pursued by the Bank of Israel. The bank maintained its contractionary interest rate policy, keeping the interest rate at 4.5% after reducing it only once at the beginning of the year by 0.25%.
“Private consumption is affected by the level of interest rates and uncertainty about the future, which is manifested in the tendency to postpone purchases of consumer durables,” says Ronen Menachem, chief market economist at Mizrahi Tefahot Bank. “In addition, there are various restrictions on imports from abroad.” Abroad, the rise in import prices, along with the weakness of the shekel, negatively affects this consumer trend.”
In the last quarter of 2023, Israel’s GDP fell by more than 20% from the previous quarter. This has been balanced by a moderate recovery in the first quarter of this year, but GDP remains a “lagging stage.”
Menachem says the negative factors are offset to some extent by Israel’s high employment rate, wage increases, and government transfers to reservists and to evacuees from the Gaza border area and the north, which lead to increased family income.
The chief economist at Bank Leumi, Dr. Jill Boffman The recovery of the economy since the war began is evident in the number of job vacancies. “The number of job vacancies in the economy in figures from the Central Statistics Office rose 0.5% in May from the previous month to 137,100 jobs.
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“This is 21% higher than what was recorded in September 2023, before the outbreak of war, and is the highest number since January 2023.” However, Boffman sees this not as a “significant rise in the general demand for workers” but rather as a “measured return to the pre-war state of the economy.”
Instability in private consumption also affects expectations of interest rate cuts in the near future. “Given the recent increase in uncertainty, the Bank of Israel is expected to keep interest rates unchanged in the next few months. The rise in uncertainty is evident, among other things, in the widening of the gap between yields on dollar-denominated Israeli government bonds and yields on bonds The equation in the United States, in light of the political developments in Israel, the escalation of fighting in the north of the country, and the widening of the financial deficit.
No interest rate cut in July?
In two weeks, on July 8, the Bank of Israel is scheduled to announce its interest rate decision. Despite the fear of a decline in the consumption rate, most economists believe that the bank will wait before easing the interest rate burden.
“It is not unlikely that by the end of 2024 or the beginning of 2025, conditions will be ripe for lower interest rates,” says Boffman. “Among these factors are a convergence of the inflation rate at the middle of the target range for price stability, and an easing of monetary policy by the central banks of Israel’s trading partners – the US, the Eurozone, and the UK.”
Mitav Dash’s chief economist, Alex Zabijinski, believes that lower inflation and inflation expectations increase the chances of an interest rate cut earlier by the Bank of Israel, but not in its next decision. “Expectations of the level of interest rates quoted in interest rate futures have fallen by about 0.25% in a week. Were it not for the increase in security risks, we would have assessed the chances of the central bank cutting the interest rate by a significant amount as early as its next meeting in July,” says Zabieszynski.
Published by Globes, Israel Business News – en.globes.co.il – on June 24, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
