The Bank of Israel (BOI) released its Financial Stability Report on Israel’s economy in the second half of 2022 and the outlook was good. Israel clearly did better than most developed nations during the worldwide financial crisis of 2022, with lower than average inflation and continued investments in high tech startups. However, Israel did see a lot of contraction and shutdowns even in Q4 2022.
In the report, BOI economists analyzed exposure to the main risks to the financial system, and assess potential risk scenarios. The assessments and analyses contained in the Report are based on a survey of developments during the reviewed period, an examination of structural changes, the use of analytical models, and assessments of the background conditions in the global and domestic economies.
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The report outlines how the realization of risk scenarios may affect the financial system in the short and medium terms, with the aim of increasing awareness among policymakers and the general public and enabling proper preparedness.
The BOI’s main findings were:
• The risk of a global recession increased during the reviewed period, in view of an increase in geopolitical risks and the development of inflation and the resulting monetary tightening. These factors also led to declines in the financial markets.
• Israel is in good shape relative to the OECD in terms of macro data. Even though inflation is higher than the target, it is lower than in other developed economies. The labor market is tight, and there is relatively strong growth in economic activity.
• Credit to businesses and households expanded rapidly in 2022, following rapid growth in 2021 as well. However, since April 2022, there have been signs of moderation in the growth rate of credit, in view of the increase in interest rates and in yields in the economy.
• Equity prices in Israel declined in the second half of 2022, similar to those in many other countries, while corporate bond spreads in Israel increased moderately. Despite the declines in equity prices, the long-term P/E ratio is not low by historical comparison.
• Home prices increased sharply during the reviewed period, while the ratio between home prices and fundamental factors increased.