Bank of Israel Governor Prof. Amir Yaron opened his remarks at the press conference following the Monetary Committee's decision, which he heads, to leave the interest rate unchanged at 4.5% by saying, "The State of Israel is in a continuing war, and recently the intensity of the fighting has increased on the northern front. The geopolitical uncertainty remains high. As we have emphasized, the war has significant economic ramifications, and the path back to routine full activity of the Israeli economy still lies ahead of us. We are facing notable economic challenges, and dealing with them requires conducting responsible economic policy, both fiscal and monetary, in order to ensure the continued financial robustness and economic growth in the future.
He continued, "In contrast to the global trend, the inflation environment in Israel has been on an upward trend in recent months. The inflation rate is above the upper bound of the target range and the year over year inflation rate continued to increase in August. The increase in the inflation rate is across a wide range of components, both tradable and non-tradable. Inflation expectations, which are an important component of our analysis in examining the monetary process, reflect a further increase in the inflation rate expected at the beginning of 2025, and moderation toward the target only in the second half of the year. The expectations for longer terms are within the target range. In the Committee’s assessment, among the factors liable to lead to an additional increase in the inflation environment are the continuation of the war and its impact on economic activity, including shekel depreciation, housing market activity and the constraints on it, fiscal developments, and global oil prices.
"Analysis of real economic activity shows that the economy has not yet returned to the level of activity that prevailed just before the war. The economy’s second quarter growth was low, and revised slightly lower by the Central Bureau of Statistics. Accordingly, GDP is 3.3% below the long-term trend line. However, based on current indicators, there was a moderate recovery in economic activity in the beginning of the third quarter. The growth rate of private consumption, which moderated in the second quarter of 2024, is showing slight signs of recovery, as reflected in the increase in nominal credit card expenditure data. In addition, high tech services exports, fund raising by high tech companies, and the Purchasing Managers Index are also pointing to a trend of improvement in activity. The Business Tendency Survey for September reflects a mixed trend among businesses, mainly against the background of the deterioration in the security situation in the north."
Yaron also spoke about the recent downgrade of Israel by the international ratings agencies. He said, "It is important to pay attention and take the assessments of the rating agencies seriously, as they reflect the challenges and risks faced by the Israel economy as the world sees it. The credit rating agencies emphasize the impact of the geopolitical reality, but also the importance of fiscal policy conduct, with an emphasis on the importance of the future policy framework. The rating agencies explained that the decision to downgrade Israel was made for various reasons. These include first and foremost the geopolitical uncertainty, the increased intensity of the war in the northern front, and the decline in the probability of a ceasefire in Gaza. In addition, Moody’s also emphasized: the process of passing the budget, and the ability to carry out the required fiscal adjustments, the difficulty in recruiting the ultra-Orthodox, and the processes of changes in the judicial system. It is important to emphasize, as the agencies did as well, that the State of Israel has experienced geopolitical crises in the past, including in periods in which the debt to GDP ratios were much higher, and there has never been any delay in repaying Israel’s debt. The trust of the markets and of international economic institutions is essential for the stability of the Israeli economy. To ensure the continued trust of the markets in the Israeli economy, it is important that the government act to deal with the economic issues raised in the reports, which to a large extent are in line with the recommendations raised in the past by the Bank of Israel."
"The updated macroeconomic forecast published today by the Research Department incorporates recent developments. The Department assumes that the war, which expanded on the northern front too, will continue at a high intensity in the beginning of 2025 as well.
"In the baseline scenario, the Department's assessment is that GDP is expected to grow by 0.5% in 2024 and by 3.8% in 2025. This is a growth rate that is lower than the July forecast by 1 percentage point in 2024 and by 0.4% points in 2025, and distances the economy from the growth trend of recent years. The forecast for the inflation rate was increased from the previous forecast and assumes that annual inflation is expected to be 3.8% at the end of 2024 and 2.8% in 2025. The government budget deficit is expected to be 7.2% of GDP in 2024, in view of the growth in the costs of the war and the flows of special US aid that were partly shifted to 2025 and onward. In 2025, the deficit is expected to reach 4.9% of GDP, under the assumption that fiscal adjustments of a permanent nature will be made, totaling NIS 30 billion. The public debt is expected to reach a level of approximately 68% of GDP in 2024 and approximately 69% of GDP in 2025."
On the budget he said, "The State budget for 2025 is challenging, and the progress in formulating it is positive, certainly in view of the scope of required fiscal adjustments. Approval of a responsible budget for 2025 is an essential component in strengthening the international markets’ trust and maintaining the economy’s robustness. It is important that the government and Knesset approve significant fiscal adjustments of a permanent nature, in contrast to the consistent increase in defense expenditures. This is in order to allow the debt to GDP ratio to stabilize and go back to declining over the next 2 years. In this regard, the steps presented by the Minister of Finance are in the right direction. From the perspective of the composition of the budget, the adjustments should be spread out over as broad a population as possible, and it is important that the government prioritizes growth-supporting expenditures, reduces negative incentives for going out to work, and eliminates non-essential ministries."
Published by Globes, Israel business news - en.globes.co.il - on October 9, 2024.
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