Israel’s wartime economic trends are looking like the peaks and valleys in a heartrate monitor, after growth dropped substantially in the second quarter to almost zero. This follows the dramatic swings in the prior six months, when the country had a sharp economic downturn in the months after October 7 and a notable uptick in the first quarter of 2024. Inflation also rose in second quarter.
However, not all was bad news for Israel, which also saw the unemployment rate decline, according to the latest report from the Bank of Israel (BOI), who on August 28 kept interest rates steady at 4.5%.
The nation’s central bank reported that Israel’s national economic growth in the April-June period dropped to just 0.3% growth as measured by gross domestic product (GDP), a sharp contrast to the more than 4% growth the quarter before. In fact, a report in late August from the Organization for Economic Cooperation and Development (OECD) reported that Israel had by far the largest drop-off in economic growth from the first to second quarters of 2024 among the more than two dozen member nations that reported. That’s in part because Israel also had by far the most economic growth in the first quarter among the reporting nations, as the Jewish state recovered from the dramatic economic impact of the October 7 Hamas terror massacre and start of the Gaza war.
The Bank of Israel noted the nation’s economic growth measurement was revised upwards for both fourth quarter 2023 and the first three months of this year, even as growth in the second quarter was below the Bank’s trend line. The Bank’s press release pointed directly towards the impact of the war in Gaza—for which large numbers of military reserves have been called into duty—and Hezbollah’s ongoing attacks that have shut down the north of the country.
“Supply limitations, primarily in view of the shortage of workers, particularly in the construction industry, are a main factor in the gap of GDP from its growth trend line,” said the BOI press release, noting that this is expected to continue “as long as the shortage of non-Israeli workers, the considerable mobilization of the [IDF] reserves, and the limitations on activity in the Northern border area continue.”
Meanwhile, inflation is speeding up in Israel, raising costs. As measured by the Consumer Price Index (CPI), inflation rose 0.6% in July after rising slightly in June. The national Bank reported that over the last 12 months, costs in Israel are up 3.2%, which the Bank said is “slightly” above the higher range of where inflation should be. This has led the Bank to predict inflation for the coming year will be higher than previously expected.
On Friday, Israeli Finance Minister Betzalel Smotrich highlighted honey as a product in scope for cost-reduction efforts as the season for the traditional food for Rosh Hashannah (Jewish New Year) comes up. In a post to X (formerly Twitter) on Friday, Smotrich said in comments translated by Google: “We continue to fight the cost of living in every way. Towards Rosh Hashanah and the winter months, when honey consumption is at its peak, we reached understandings that will allow the market to be opened to imports, which will lower honey prices in Israel. We are fighting the cost of living with all our might and we will win this fight.”
Government spending amidst the war effort rose in July, per the BOI. The government’s budget deficit as compared to the overall economy rose to 8.1% of GDP during the month. The Bank said that uncertainty around next year’s budget and implementation of cost-cutting measures “is liable” to hamper the return of inflation back toward its target rate.
Smotrich, in a separate post to X on Thursday translated by Google, highlighted the “unprecedented” financial impact caused by the Gaza war. This includes 200,000 evacuees, half a million requests from businesses for indirect war-related compensation and 36,000 claims for direct damage.
On the positive side, unemployment in Israel dipped to 4% in July from 4.6% the month before. Those figures are even lower when not including those serving in the IDF reserves (3.3% unemployment in July versus 3.7% in June). Since the start of 2023, wage growth has increased more than in prior years, although due to inflation the “real wage” number is close to the trend line. Overall, the national Bank said indications are for moderate growth for businesses in Israel in the July-August stretch.
That comes as Israel’s stock market is pointing up for the year. The Tel Aviv Stock Exchange’s (TASE) flagship group of largest companies, known as the TA-35, is up a little more than 11% year-to-date according to the TASE website. A comparable collection of top companies in the United States, as measured by the S&P 500 index, is up 19%.
(By Joshua Spurlock, www.themideastupdate.com, September 1, 2024)