Israel’s economy seems to be doing okay, but is everything as it seems?

Economists are warning of a deep economic crisis in Israel — or even a collapse — and some international credit rating companies have already lowered the country’s rating and forecast. The long war against the Hamas terror group, widespread mobilization of IDF reservists, shaky international relations, vast public expenditure, the way the government is managed, and the ostensible attempts to undercut the basics of democratic rule — any one of these could alone cause an economic crisis.

But the main barometers of the economic situation don’t indicate a deep crisis; none of them are great, but they are not awful either. According to these measures, the situation is a little worse than before the war, but incomparably better than during its first months.

The main indices at the Tel Aviv Stock Exchange are higher than before the war and are nearing records seen in 2022. The Tel Aviv 35 index closed on Sunday at 1,984.9 points. (The index surpassed 2,000 in January, April, and August of 2022 and hasn’t done so again since. Before the war, it stood at around 1,830 points.)

When the war began on October 7, the indices fell, but by the end of the month the stock exchange began to recover. The Tel Aviv 35 index reached about 1,850 at the end of December, a little higher than before the war. Now, it’s some eight percent higher than before the war.

Before the current government was sworn in, the local stock exchange almost matched the major stock exchanges of the US, Europe, and East Asia. Today, Tel Aviv is far behind them, and in the last year and a half, most of those stock exchanges have risen much higher. However, the upward movement of the Tel Aviv indices is cause for satisfaction, given the local circumstances.

The shekel’s exchange rate with Western currencies is also close to what it was before the war. On Saturday, the US dollar’s exchange rate was determined at NIS 3.75 — eight agorot lower than the last exchange rate before the war, on October 5.

During the COVID-19 crisis, the shekel became one of the strongest currencies in the world thanks to the thriving high-tech industry. In 2022, the “COVID bubble” burst, and the US dollar rose to about NIS 3.5. In 2023, it continued to rise, and by last September, it had reached NIS 3.8.

When the war broke out, the US dollar jumped to over four shekels, but by the end of December, it had fallen to about NIS 3.6 — less than before the war. These days, it ranges between NIS 3.7 and NIS 3.8.

The euro has strengthened more in the last two years compared to the US dollar for reasons unrelated to Israel, but it has followed a similar trend in relation to the shekel as the US dollar.

The euro’s exchange rate stood at just over four shekels at the end of September and jumped when the war began, but has gone back down since then and currently stands at around NIS 4.04

Unemployment has risen, quality of life worsened

Unemployment rates in Israel were very low before the war and are very high today, but they have not reached COVID records at any point during the war. The limited official unemployment rate (people without jobs who are eligible for unemployment benefits) stood at only three percent in May.

The expanded unemployment rate, which includes people who were put on upaid leave during the war and people who were fired and have stopped being eligible for unemployment benefits, stood at around 5.3% in May.

The expanded unemployment rate was at 4.2% in September, jumping to 9.6% in October (it reached 10.4% when including parents who stayed home with their kids — more than 400,000 people). It went down to 8.5% in November, 6.1% in December (some 300,000 people), and 5% by April. It rose a little in May compared to April but still wasn’t high.

Israel’s Central Bureau of Statistics publishes growth statistics every quarter, meaning that the most updated data is from the end of March. According to the bureau’s data, the gross domestic product (GDP) rose in the first quarter of 2024 compared to the last quarter of 2023.

This is not as positive as it may seem. The GDP jumped in the first quarter of 2024 because it shrank in the last quarter of 2023. According to the CBS’s data, GDP in the last quarter of 2023 shrank by some 19%.

GDP in the first quarter of 2024 was 1.3% lower than the same period last year. In terms of growth per capita, the GDP fell in the first quarter of 2024 by some three percent compared to the first quarter of 2023. Change to GDP per capita is considered the accepted index for changes in quality of life, meaning that the quality of life in Israel this April was, according to CBS data, lower than that of the same month last year.

The GDP per capita in 2023 slipped by 0.1% compared to 2022, meaning it practically didn’t change. The rapid growth during 2022 and at the beginning of 2023 transitioned throughout the latter year into a slow growth, and then the war began and stopped it entirely.

Growth began again at the beginning of 2024 because of a rise in consumerism. According to the CBS, private spending rose in the first quarter of 2024 by some 26.3%, after it came to a near halt at the beginning of the war, falling in the last quarter of 2023 by some 27%.

Public spending has risen much higher during the war than in recent decades because of mobilization of reservists, purchase of armaments, and aid for evacuees and victims of the war. Public spending rose in the last quarter of 2023 by 88% and continued to climb in this year’s first quarter, by 7%. Security spending rose in the fourth quarter last year by 27% and continued to climb in this year’s first quarter, by 39%.

But while Israelis are buying a lot of products, most of which are imported, the local industry is interacting less with other nations. Local exports, which broke all-time records in 2021 and 2022, only rose slightly in the first quarter of 2023 despite a huge jump in security exports, and since the war began, they have started to fall.

According to CBS data, the export of goods and services from Israel fell by 18% in the last quarter of 2023. Throughout the year, exports fell by 2.2%. The main reason for this is the damage the war has done to the tech sector and agriculture.

Exports continued to drop at the beginning of 2024. During this year’s first quarter, exports fell by 5.5% compared to the previous quarter and by 26% compared to the same period last year. This is despite security exports continuing to rise.

The prevailing assessment among economists is that the recovery of local consumerism is temporary and stems from the army’s massive expenses and the purchasing of aid for evacuees, which has spread to civilians and businesses.

‘We’re heading toward deep recession’

According to accounting and economic consulting firm BDO’s chief economist, Chen Herzog, “the army is acting as a shock absorber that is keeping businesses alive instead of productive economic activity doing so. Businesses are operating at low productivity because their employees are on reserve duty, some are even closed, but the employees continue to be paid by the Defense Ministry.

“Thanks to the payments from the army and financial aid from the government, people still have money to spend, so public spending recovered in the first quarter and the sense of wealth returned. Added to this is the massive governmental buying of weaponry and military equipment from businesses. However, exports, investments, and businesses’ production have shrunk greatly.

“The market has no way of funding the accumulating governmental expenses,” he warned. “All the indicators show that we are heading toward deep recession and are actually already in recession.”

The Finance Ministry’s macroeconomic forecast published in April said that the GDP was expected to grow this year by only two percent. The population growth rate is higher, meaning a slight fall in GDP per capita and quality of life.

Says the forecast: “Supply is recovering after a significant reduction in the scope of reserve mobilization compared to the beginning of the war. We estimate that negative consumer sentiment will continue to harm demand.

“The demand for incoming tourism has plummeted, and experience from recent security events shows that this is expected to continue… Extensive unemployment rates will continue to gradually sink throughout 2024 and will reach prewar numbers in 2025.

“The government’s budget deficit in 2024 is expected to conclude at 6.6% of the GDP. Debt is expected to rise to 67% of the GDP. The updated state budget for 2024 includes an increase in expenditure by NIS 70 billion to the original budget, 55 billion for security expenses and 15 billion for war-related civil spending.

“Beyond that, the government is expected to pay compensations from its compensation fund amounting to some NIS 18 billion that won’t be considered expenses from the budget but will require government funding.”

The treasury’s pessimistic forecast is based on the assumption that the war will end soon — an assumption that is in no way certain. Some ministers, including Finance Minister Bezalel Smotrich and, at times, Prime Minister Benjamin Netanyahu, have indicated that they want to leave the IDF in Gaza and establish military rule, which would cost tens of billions of shekels. The Finance Ministry has not held a single meeting on the cost of such a plan.

Furthermore, the treasury’s forecast assumes that the war will remain at its current pace and won’t worsen.

According to the Treasury, “the forecast assumes that the war will mainly focus on one front in Gaza and that its macroeconomic consequences will continue to affect 2024 at a reducing rate.

“Future developments that may affect the duration and scope of the war will, of course, significantly affect economic developments,” it notes, however. “Specifically, expanding the war to the northern front is expected to have a significant negative economic influence.

“Such an expansion will cause further harm to growth and may come with disruptions to possible routine activity. This will affect markets, inflation, deficit, and government debt among others.

“Another risk to the deficit comes from uncertainty regarding Israel receiving full financial aid for security buying from the US,” the forecast notes. “Due to this, we estimate that the balance of risks regarding the growth forecast is trending downward.”

Sources in the capital market say that the rising concern about escalation in the fighting with Hezbollah, which could lead to war with Syria and Iran too, has not affected the stock exchange and exchange rates. This is because investors are still hoping for an arrangement that would lead to a permanent ceasefire in Gaza and the release of hostages and would prevent escalation in the north.

A source in the trading room of a leading financial organization said, however, that “the situation certainly affects trade. The stock exchange is shuffling and the shekel is weak. It isn’t immediately clear because the big stock exchanges in the world are seeing a steep rise and Israeli investors’ money is invested in them, so there is seemingly growth, especially after [so much] investment [capital] was moved abroad last year. They’re earning dollars and buying shekels with it, which boosts the shekel.

“But there is a big gap between the growth in international stock exchanges and the growth in Tel Aviv. We’re far behind. There’s a massive gap between the shekel in reality and the shekel that should have been if the situation in the country hadn’t been shaken. The dollar should have been worth three shekels.”

The Times of Israel asked this source: The shekel’s decline began at the beginning of 2022 and the gap between the stock exchanges in Israel and around the world started at the end of 2022. At the beginning of the war, the shekel and the Tel Aviv stock exchange fell but have returned to prewar rates since. How do you explain that?

The source replied: “Sometimes investors see a few steps forward and sell out before events happen.”

We also asked: Some people warned that the government’s policies could lead to a security disaster before it happened. Is it possible that anticipation of the war affected the market before the war began?

“Yes,” the source replied. “Seemingly, part of the influence the war had was already embodied in the decline of rates that began even before it broke out. This was added to investors’ concerns about the effect the government’s stymied judicial reform would have on their money. Weak courts are a problem for the economy.”

Finally, we asked: How do investors see the possibility of a ceasefire and warnings of escalation?

“They don’t know what will happen, so they’re on the fence. Trading cycles are small most days because investors don’t want to act without knowing what direction they’re moving in. Lower rates in the stock exchange and shekel are seen in big cycles on Thursdays because investors want to get rid of stock and shekels before the weekend in case of escalation.

“If something big happens up north, the dollar and euro will soar, and the stock exchange will sink,” said the source. “And vice versa: If there is suddenly a deal and a ceasefire, we’ll see a large trend upwards.”

Translated and edited from the original on Zman Yisrael, the Times of Israel’s Hebrew site.

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