After a sharp plunge in private consumption by Israelis in the initial months after the October 7 attack, recently it has looked as though consumption is almost back to normal. In the first quarter of this year, consumption rose by 6%, after falling by 7.5% in the final quarter of 2023.
State revenues figures also indicate strength in the economy. In May, state revenues were 2% higher than in May 2023, and so far this year revenues have exceeded the Ministry of Finance’s forecast in March’s budget.
In the period February to April, credit card purchases rose 4.7%.
Several analysts fear, however, that the picture will shortly change. Bank Leumi estimates that demand in Israel will continue to moderate. Alon Kol Kreis, a research economist at the bank, says, "We assume that negative background factors currently weighing on private consumption will continue to continue to act to damp inflation. Among these are the only partial recovery of economic activity from the effects of the war, low consumer confidence, relatively high interest rates, and the expectation of substantially higher tax rates at the beginning of 2025."
Bank Leumi estimates that the annual rate of inflation will fall to 2.5% by the end of the year.
Postponement of purchases
One reason for a decline in consumption is the Bank of Israel’s monetary policy. The bank has maintained a contractionary interest rate policy, keeping its rate at 4.5% after just one cut at the beginning of the year, by 0.25%.
Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank, says, "Private consumption is affected by the level of interest rates and by uncertainty about the future, manifest in a tendency to postpone purchases of consumer durables. In addition, various restrictions on imports from abroad and a rise in import prices, together with a weakening of the shekel, are adversely affecting this consumption stream."
In the final quarter of 2023, Israel’s GDP fell by more than 20% from the previous quarter. This was balanced by a moderate recovery in the first quarter of this year, but GDP is still "in arrears".
Menachem says that the negative factors are to some degree offset by the high rate of employment in Israel, pay rises, and government transfers to reserve soldiers and to evacuees from the Gaza border area and the north, expanding household income.
Bank Leumi chief economist Dr. Gil Bufman says that the recovery of the economy since the war started is evident in the number of job vacancies. "The number of job vacancies in the economy in the figures released by the Central Bureau of Statistics rose by 0.5% in May from the previous month to 137,100 jobs.
"This is 21% more than recorded in September 2023, before the outbreak of war, and the highest figure since January 2023." Bufman does not, however, see this as a "significant rise in general demand for workers" but rather as "a measured return to the state of the economy before the war."
The instability in private consumption also affects the outlook for interest rate cuts in the near future. "Given the rise in uncertainty lately, the Bank of Israel can be expected to keep the interest rate as it is in the next few months. The rise in uncertainty is manifest in, among other things, a widening of the gap between yields on dollar-denominated Israel government bonds and yields on equivalent bonds in the US, in the shadow of political developments in Israel, escalation in the fighting in the north of the country, and the expansion of the fiscal deficit."
No interest rate cut in July?
In two weeks’ time, on July 8, the Bank of Israel is due to announce an interest rate decision. Despite the fear of a decline in the rate of consumption, most economists believe that the bank will wait before easing the interest rate burden.
"It is not inconceivable that towards the end of 2024 or at the beginning of 2025 conditions will be ripe for an interest rate reduction," says Bufman. "Among these are an inflation rate converging on the middle of the price stability target range, and an easing of monetary policy by the central banks of Israel’s trading partners - the US, the euro block, and the UK."
Meitav Dash chief economist Alex Zabezhinsky believes that the decline in inflation and in inflation expectations raises the chances of an earlier interest rate cut by the Bank of Israel, although not in its next decision. "The expectations of the level of interest rates priced into interest rate futures have fallen by nearly 0.25% within a week. Were it not for the increased security risk, we would rate as high the chances that the central bank will cut its interest rate as early as its next meeting in July," Zabezhinsky says.
Published by Globes, Israel business news - en.globes.co.il - on June 24, 2024.
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