The rising cost of living is making Israelis change their consumption habits. Credit card spending figures, a key indicator of the state of the economy, show a decline in real terms (discounting inflation) in the second quarter in almost all areas, from fuel to food to electrical products.
In nominal terms, credit card spending rose by a negligible 0.04% in comparison with the first quarter. When inflation is taken account (running at annual rate of 4.6% to the end of May), that represents a real decline. The figures are based on the daily average in the second quarter to June 12, in comparison with the daily average in the first quarter.
Bank Hapoalim chief financial markets strategist Modi Shafrir calculates, on the basis of Bank of Israel figures, that spending on food rose by 0.05% between the first and second quarters. Given the large price increases by importers and manufacturers, by as much as 10% in some cases, and taking into account natural population growth, the decline in spending in real terms is substantial. People are buying less.
Signs of cooling consumption can be seen on the side of the retail chains as well. According to the Central Bureau of Statistics, their total sales proceeds fell by an annualized 1.6% in the period February to April 2023.
The largest decline in credit card spending is in the "Industrial Products" category, which means almost every consumer product that is not food: clothing and footwear, electrical and electronic products, furniture, and so forth. Spending in this category declined by 4.2% in the second quarter in comparison with the first. Cutting back on these products seems to be the main way in which Israelis are coping with inflation and with the ten interest rate hikes since April 2022. An average salary rise of 5.1% in the year to April was apparently not enough to offset the effect of price rises.
The main category in which there has been a substantial rise in spending is education and leisure, which was up 5.6%. Education seems to be the last area in which Israelis are prepared to cut back in difficult times. Spending on restaurants rose by 1.1%, when prices rose by considerably more.
What is driving economic growth?
Just this week, the Central Bureau of Statistics revised its growth estimate for the first quarter upwards, to an annualized 3.1%. How does that fit with a slowdown in consumption? Rinat Ashkenazi, chief economist at insurance and finance group The Phoenix Holdings, says there is no contradiction. "Spending with credit cards mainly represents private consumption, which fell 1.7% in the first quarter.
"Economic growth includes other elements, such as investment in housing, where purchases were still strong in the first quarter in comparison with last year. Exports, particularly high-tech, also kept the economy strong. But industry, transport, and trade are showing declines. This is different from the situation elsewhere. In the US, for example, it is consumers who are leading growth, probably because savings built up during the Covid pandemic have lasted longer there."
What about the future? Shafrir: "From the figures we have seen so far, it looks as though household consumption will show a decline in the second quarter as well, for the same reasons as have applied up to now - high inflation and rising interest rates that are reducing households’ disposable income. It’s hard to tell what will happen in the third quarter, but we will probably not see spending take off. In the long term, it can be assumed that the rising trend will return. Many Israelis see raising their standard of living as a priority."
Published by Globes, Israel business news - en.globes.co.il - on June 21, 2023.
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