The economic environment in Israel still looks strong. The latest GDP figures from the Central Bureau of Statistics indicate that the economy is still growing by more than the rate of population growth, while the labor market is stable and robust, with a historically low unemployment rate. Despite the encouraging statistics, however, investment houses Leader Capital Markets and Meitav see increasing indications of a slowdown in economic activity in Israel.
Leader Capital Markets chief economist Yonatan Katz told "Globes": "The annualized growth figure for the second quarter of this year was 3%. That looks like a very encouraging statistic, but when you examine the numbers in depth the picture looks somewhat different. Per capita private consumption, for example, is at a standstill, exports fell, and there was no growth in investment.
"Apart from all that, the Central Bureau of Statistics figures indicate a decline in total proceeds in the sectors of the economy of an annualized 0.7% in the second quarter of the year, after a 0.4% rise in the first quarter. Wholesale-retail trade shrank at a rate of 3.1%, and proceeds in the hospitality and catering industry fell at a rate of 10.1%. At the end of the quarter, there were signs that the decline in proceeds is accelerating, on a seasonally adjusted basis, with a 2.2% drop in June."
On industrial activity, Katz says, "Industrial production fell by 1.8% in the second quarter of the year, following a 1.7% fall in the first quarter, with a particularly sharp fall in the high-tech industry of 3.4% in the second quarter. The procurement managers index, which stood at 48.3 points in July, also continues to indicate contraction, with orders for exports declining (45.6 points), although orders for the domestic market rose (55.3 points."
Meitav chief economist Alex Zabezhinsky seconds Katz’s assessment, saying, "The decline in economic growth first of all reflects the impact of contractionary monetary policy. The banks’ aggregate interest income in the second quarter was NIS 32 billion. Before interest rates started rising, their aggregate interest income was NIS 46 billion in four quarters. Expenditure of businesses and households on interest payments, instead of on consumption and investment, is growing by nearly NIS 90 billion annually, which represents 5% of GDP. If we bring in non-bank credit as well, we arrive at even higher amounts."
Tight labor market
"Despite the signs of a slowdown in activity in Israel, the labor market does not match the weakness in real economic activity," explains Katz. "Although at age 15+ there has been no additional employment in the past two months (seasonally adjusted), that figure is a little misleading. Looking at the cross section of the main age group (25-64), the number of those in employment rose in July, and the unemployment rate fell to a low of 3% from 3.3% in June.
"School pupils and students usually join the workforce in the summer months, but this year it has apparently been in lower numbers. Looking at the main age group, the labor market is still tight, with rapid absorption of new workers. The number of employees in industry is growing, while in high-tech and services the number is falling.
"The effect of a rise in interest rates usually percolates through to the labor market about and year and a half after these steps are taken, and so we see the unemployment rate climbing above 4% in 2024."
In his market review, Zabezhinsky also sees the labor market weakening. "Despite the good figures, we estimate that the unemployment rate will rise in the coming year as the economy weakens. The decline in the demand for workers is already expressing itself in a decline in the number of job vacancies, and in businesses’ expectations about hiring workers."
Published by Globes, Israel business news - en.globes.co.il - on August 28, 2023.
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