Prime Minister Benjamin Netanyahu by BOI Governor Prof. Amir Yaron.
In 2023, economic developments in Israel were markedly affected by two significant domestic events: the government of Israel’s proposed judicial reform legislation, which led to huge discourse and massive protests in the country because many felt that it would harm Israel’s democracy, and the Swords of Iron War against the terrorist organization Hamas in Gaza that broke out after the barbaric massacre enacted by Hamas on October 7. This is according to the Bank of Israel’s (BOI) report for the year 2023 which was presented to Prime Minister Benjamin Netanyahu by BOI Governor Prof. Amir Yaron.
Governor Yaron said October 7 “created a sharp distinction between economic developments and policy in the first three quarters of the year and those in the final quarter.”
The Bank reported that in 2023, the global environment was relatively stable, and featured a decline in inflation rates, moderate growth, stability of interest rates, and a sharp increase in equity prices. In Israel GDP grew by 2% in 2023—near-zero growth per capita—with a decline in the pace of growth of most uses. Until the outbreak of the war, inflation moderated and the positive output gap narrowed, with growth that was lower than the economy’s long-term pace. This process is referred to as a “soft landing”. In the fourth quarter, GDP declined by 5.6%, influenced by the war.
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Until the outbreak of the war, the labor market remained at full employment, and featured an accelerated increase of nominal wages, a low unemployment rate, and a high job vacancy rate, which moderated during the year.
The pace of annual inflation moderated during the year, influenced by tight monetary policy, from 5.4% at the beginning of the year to 3 percent at the end—the upper bound of the inflation target. The process of raising the Bank of Israel interest rate, which began in April 2022, continued in the first half of 2023, when it was raised by 1.5 percentage points to 4.75%, with an increase in the real interest rate.
Also, said the Bank, until the war, fiscal policy was conservative. There was a measured increase in the cumulative annual deficit, mainly due to the dwindling of irregular revenues such as were recorded in previous years. The original two-year budget for 2023–2024 that was approved at the end of May included almost no important reforms to support sustainable long-term economic growth.
The necessary budgetary increment required in 2023 and 2024 due to the war has already reached 100 billion Shekels. With the outbreak of the war, Israel’s risk premium rose sharply, and then moderated slightly thereafter. The shekel depreciated sharply at the beginning of the war, but then appreciated relative to its prewar level.
The Bank predicted that the consequences of the war will continue into the medium term.
“Due to the long-term nature of the increased defense and rehabilitation costs, it is important that they be accompanied by budgetary adjustments of a similar scale in order to prevent an increase in the debt to GDP ratio over time and the damage that would come with it,” it said.
The low debt to GDP ratio in Israel, stressed Yaron, is a strategic asset, and the level of this ratio just before the war facilitated the economy’s dealing with the immediate fiscal ramifications of the war and illustrated once again its importance in the economy’s resilience to shocks.
Yaron also said that Israel’s economy is facing significant challenges deriving from the war, in addition to structural challenges related to its fundamental problems that have existed for some time already.
“The Israeli economy has known how to recover from more than a few difficult periods in the past and to return rapidly to prosperity,” said Yaron, stating that Israel should be expected to overcome the current problems.
However, he conditioned this by adding, “The implementation of responsible economic policy while dealing with current challenges, concurrently with handling the fundamental challenges to the economy and encouragement of its growth drivers, will help achieve sustainable growth.
