Despite the ongoing conflict between Israel and Hamas, the Bank of America (BofA) said Israel is doing pretty well.
In its Global Economic Weekly report published Friday, BofA said that Israel’s budget deficit is getting bigger but is still under control. Inflation in Israel is going down, and if there is a ceasefire, inflation could decline even faster.
Additionally, credit card spending is going up. Unemployment has increased slightly since the conflict started but is still lower than during the COVID crisis.
Specifically, the report — which also included updates on the US, Germany, United Kingdom, Australian, and Latin American markets — said Israel is poised to manage its budget deficit effectively.
“The budget deficit is growing but still manageable,” BofA wrote. “The budget deficit grew to 4.2% of GDP in December on a 12-month basis. Expenditures increased by 14.2%, while revenues decreased by 6.4%. Tax revenues decreased by 5.5% compared to the previous year, while interest expenses increased by 6.1%.”
The bank revised its 2024 budget deficit forecast from 5% to 6.5%. The report underscored, however, that if the conflict continues much longer, costs could escalate further. On the other hand, an expedited ceasefire could reduce expenses.
Low debt-to-GDP ratio
Israel maintains a relatively low debt-to-GDP ratio of approximately 62%. BofA said it anticipates a temporary increase in the debt-to-GDP ratio, nearing 68% this year, but the ratio is expected to begin declining by 2025.
“We do not anticipate difficulties in funding the deficit,” BofA said.
The bank also noted: “Almost all measures of inflation show a significant decrease.”
BofA mentioned that Israel’s overall inflation rate is now at the highest level allowed, 3%. However, inflation in tradable items – things that can be bought and sold internationally – went down to 1.77%. Inflation in non-tradable items – things that can only be purchased and sold within the country – excluding housing, fruits, and vegetables- decreased to 2.95%.
Additionally, the inflation in the consumer price index, which measures the average change over time in the prices paid by consumers for goods and services, went down from its highest point of 5.4% in early 2023 to 3.0% in December.
The bank explained that the decrease in inflation is mainly because of factors related to the demand for goods and services.
So far, the problems regarding the supply of goods and services have yet to improve. But the bank said if there is a ceasefire or a solution to the conflict, it could make things easier on the supply side, help the currency, and bring down inflation faster.
Regarding credit card spending, “we expect demand conditions to remain weak and growth to revive gradually,” the bank said.
According to the bank, people are using credit cards more than before the conflict, except for travel services. And the losses were minor compared to the COVID-19 crisis. However, the bank said Israel should not expect a quick recovery like after the pandemic.
The report said the general unemployment rate went up to 10.2% when the conflict started, and now it’s at 7.2%. This is partially due to the many Israelis still serving in the reserves.
During COVID, the general unemployment rate peaked at 36%.
The bank said there are still not enough workers in the housing and agriculture sectors. This is mainly because many foreign workers left the country, and Israel decided not to let Palestinians from the West Bank come back to work in Israel, other sources have noted.
Also, security concerns along the southern and northern borders have kept people from working and affected some production capabilities, according to BofA.