Almost every sector that you look at on the Tel Aviv Stock Exchange presented record results for 2024, even though it was a tough year of war with tens of thousands of people evacuated from their homes. For defense companies, this perhaps makes sense, given the fact that the war served to exhibit their wares at a time when the world is rearming. For local airlines too, particularly El Al, the explanation is clear, with the war causing foreign airlines to abandon Israel.
But there are explanations to be found for the profit boom last year in other sectors as well. On the macro level, the state considerably increased its spending. Government expenditure jumped by 30% in comparison with 2023 to NIS 620 billion. A substantial portion of that flowed directly into people’s pockets, mainly to evacuees and reserve soldiers, but also directly or indirectly to some businesses, and was spent on private consumption.
On the micro level, the banks benefitted from high interest rates, the insurance companies benefitted from rises on the capital markets, and retailing from the low unemployment level, real rises in wages, and the fact that more purchasing power was expended in Israel, with travel abroad having become more difficult and more costly. The exception is the real estate sector. Although it recorded peak sales thanks to aggressive marketing and tempting financial offers (such as a down payment of just 20%, with the rest not payable until handover), it has suffered from the high interest rates, a shortage of manpower, and rises in inputs prices.
The strength that the Israeli economy demonstrated last year is explained by another important factor: its robustness and the spending power of households. The high savings characteristic of Israelis, alongside strong performance by the private sector in previous years, meant that the event found the economy in good shape. The State of Israel behaved like an island, with almost all consumption taking place within it.
But, and it’s a big but, it’s important to point out that the government spending increased the fiscal deficit and the national debt which, like any debt, eventually has to be repaid. Unlike in other countries, a substantial part of the Israeli debt is linked to the rate of inflation, which means that inflation will not erode its real value. This is different from the position in the US, for example. The expansive fiscal policy may have been necessary, and boosted the economy, but without restraint and a return to a downward debt curve, we shall yet pay dearly for it.
The Israeli economy has stood up well to the war, but beneath the surface cracks are starting to appear that are liable to affect its ability to cope with the large debt burden. Looking at Israel’s macro numbers for 2024, two arouse concern about the future: investment and exports, engines of future growth, both fell.
Another cause for concern is the permanent nature of current government spending. Unlike after the pandemic period, expenditure will not fall back to its level before the crisis broke on October 7 2023. It will continue to be high, because of the permanent increase in the defense budget. There are large differences between then and now, but that was one of the main causes of the severe economic crisis that followed the Yom Kippur War of 1973.
Published by Globes, Israel business news - en.globes.co.il - on March 30, 2025.
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