Israeli economy shrouded with uncertainty, hanging by a thread

By Al Mayadeen English
Source: Bloomberg
28 May 2024 15:51
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The Israeli occupation is suffering from an economic downturn mostly due to its war on Gaza, leaving policymakers incapable of taking effective measures.

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Israeli occupation forces Iron Dome systems attempt to intercept rockets launched from the Gaza Strip over occupied Askalan in occupied Palestine, on May 11, 2023. (AP)

The Bank of Israel has assessed that there are "several risks of potential acceleration in inflation," most of which are directly linked to the Israeli war on Gaza.

This includes possible geopolitical developments and their effects on economic activity, a depreciation in the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.

Moreover, government spending economic easing policies are pushing inflation to the top of the Israeli regime's 1% to 3% target range after a two-month acceleration.

According to Bloomberg, the Israeli shekel's historical volatility (HV), which measures how much traded prices move away from a central or moving average price, only trails the Chilean peso, Russian ruble, and South African rand. The Shekel's HV currently stands at 10%, the agency added.

Moreover, "Israel's" wartime bill has amounted to $16 billion, swelling its budget deficit over the past 12 months to 7% of the gross domestic product (GDP) for that period, as of April.

In the meantime, the Governor of the Central Bank continues to call on the government to adopt a responsible fiscal policy, amid substantial defense spending.

In this context, the Bank of Israel said that it expects the total annual deficit "to continue to climb in the coming months and to converge back to an environment similar to the current one toward the end of 2024."

However, the statement did say that notable deviations in security expenditures will undercut its expectations.

War on Gaza, Northern Front confrontations pressure Israeli economy

Prices in Israeli markets are rising just as the country's economic outlook worsens after some recovery in the first quarter. The length and severity of the ongoing Israeli aggression on both the Gaza Strip and Lebanon have shrouded the economy with uncertainty, according to Bloomberg.

Various industries, from construction to retail, are being affected by the war. As a result, economic growth is expected to slow down in the coming months, while the economy is still 2.8% smaller than it was before the war.

The Bank of Israel predicts the economy will grow by 2% this year, but S&P Global Ratings and Moody's Investors Service expect much weaker growth, closer to 0.5% to 0.6%.

However, the central bank has less ability to stimulate the economy now because inflation is rising. In April, inflation reached 2.8%, the highest this year. A central bank survey found that expectations for price increases over the next year rose for the fifth straight month in May, reaching 3%. This has significantly affected prices for foods, especially dairy products, and air travel.

Given the severe economic challenges posed by wartime expenditures and geopolitical uncertainties, policymakers in "Israel" are finding it increasingly challenging to implement the necessary adjustments for economic recalibration.