At a time when some sectors of the Israeli economy have begun to adapt to the conditions of the war waged by the army on the Gaza Strip, worrying figures have begun to appear for financial and monetary policy makers.
What reveals the confusion is the announcement by the Bank of Israel (the central bank) that it would keep interest rates unchanged at a meeting held last week, followed by sharp criticism from Finance Minister Bezalel Smotrich, who is seeking to reduce them.
On Wednesday, the Bank of Israel kept interest rates unchanged at 4.5%, while consumer price indices began to show an increase in local markets above the set target.
However, the Israeli Finance Minister considered maintaining interest rates as a disregard by the Bank of Israel to stimulate the local economy, given that low interest rates increase borrowing, investment and the injection of money into the market.
“Based on the data in the interest rate decision, the governor should have come to the exact opposite conclusion,” he said in a statement. “Inflation is supply-side inflation, not demand-side inflation. Flights are more expensive because companies are not flying here due to the war. Fruits and vegetables are more expensive because we do not have Thai workers.”
Smotrich is seeking to quell the harsh criticism directed at him and his government by industrialists in Israel, due to the slowdown in local economic indicators and the government’s inability to compensate for the absence of Palestinian workers.
After reaching its highest peak since 2008 at 5.4% in early 2023, inflation began a downward trajectory with interest rate hikes by the Bank of Israel, with consumer prices reaching 2.5% last February. But the consequences of the Red Sea crisis, and the absence of Palestinian and Thai workers (in the agricultural sector), soon began to appear in consumer prices in Israel.
In July, consumer prices jumped to 3.2%, up from 2.9% in June, the highest level since November 2023.
Housing prices in Israel have risen, amid a decline in supply due to the absence of Palestinian workers, while the prices of vegetables and fruits have recorded rapid increases, due to the absence of Thai workers, in addition to the Red Sea crisis.
The fear in Israel today is that consumer prices will continue to rise, which means that the Bank of Israel’s plans to cut interest rates will be postponed until the end of 2024 or even the beginning of 2025.
If this postponement takes place, it will exacerbate the crisis of the slowdown in the growth of the Israeli economy, while the cost of borrowing remains high, amid the economic and financial consequences of the war on Gaza.
The illusion of reducing unemployment
Another issue is related to what Haaretz described as the illusion of reducing unemployment, as the unemployment rate fell in July to 2.8%, compared to 3.1% in June.
This decline was not the result of creating new job opportunities in the Israeli market, through which it was able to absorb a portion of the job seekers, but rather the exclusion of a portion of the unemployed from the definition of unemployment by the Israeli Bureau of Statistics.
Due to manipulation of those entering and leaving the labor market, the unemployment rate in Israel fell in July to its lowest level ever, according to historical data from the Israeli Bureau of Statistics.
Haaretz, in a recent report published last week, says that the drop in the unemployment rate in Israel to its lowest level ever in July, at 2.8%, is based on the wrong reasons.
The real reason for the decline in unemployment is due to two things: the first is that the census considered those who entered the military as workers, and they obtained a job opportunity, and thus they were removed from the ranks of the unemployed.
The second matter is that tens of thousands of people displaced from the north and south for more than 10 months are no longer looking for work, and therefore they have been removed from the labor force in Israel.
This means that the decline in unemployment is not due to the economy moving forward quickly, which creates a high demand for workers, but rather because there is a shortage of workers and a distortion of the concept of unemployment, according to Haaretz.
Since October 7, 2023, Israel, with American support, has been waging a war on Gaza, leaving nearly 135,000 Palestinians dead and wounded, most of them children and women, and more than 10,000 missing, amid massive destruction and deadly famine.
In contempt of the international community, Israel continues the war, ignoring the UN Security Council resolution calling for an immediate halt, and the International Court of Justice’s orders to take measures to prevent acts of genocide, and to improve the catastrophic humanitarian situation in Gaza.
