Israel's Economic Stability Remains Under Strain, Bank of Israel Report Warns

Israel’s economy continues to face significant challenges, with macroeconomic risks remaining high in the second half of 2024, according to a report by the Bank of Israel. The financial stability report revealed that while the risk in asset prices and credit had decreased from high to moderately high, the overall risk to the economy remained at a “high” level. This risk assessment, which evaluates the exposure of Israel's financial system to macroeconomic conditions, underscores the continued volatility resulting from security tensions and global sentiment towards the country.

The Bank of Israel's evaluation shows that the nation's economy is still struggling. While gross domestic product (GDP) increased following a drop at the end of 2023, it remains below long-term expectations. The sluggish performance of the economy was evident in the Composite State of the Economy Index, which indicates a slowdown in economic activity in October and November 2024. This signals persistent challenges in business activity, government fundraising, and high costs associated with raising funds.

The ongoing security situation, primarily stemming from the Israel-Hamas conflict, continues to affect Israel’s economic environment. The Bank of Israel’s assessment notes that the country's security situation and the broader geopolitical risks have a detrimental impact on global investor sentiment towards Israel. These tensions are reflected in increased government bond yields, signaling concerns over the country's financial health.

On the asset front, risk levels in the second half of 2024 saw a reduction in both asset pricing and credit sectors. The risk regarding asset pricing decreased from high to moderately high, with Israeli stock indices improving in the final quarter of the year. However, stock prices in Israel remained lower than global indices, indicating persistent market concerns.

Similarly, credit risk decreased from high to moderately high, as the rate of late debt repayments remained low, despite challenges in the broader economy. This relatively stable performance in credit repayments is a positive sign for Israel's financial institutions, which are deemed durable by the Bank of Israel.

The Bank of Israel presented two primary risk scenarios for the future:

1. Geopolitical Risk: Continued security risks tied to the Israel-Hamas war and broader Middle Eastern tensions could result in further economic pressures, including harm to employment, increased security spending, and external political pressures.

2. Global Economic Uncertainty: The ongoing trend of de-globalization and low global growth adds uncertainty to Israel's economic outlook, with potential impacts on trade and international investment.

Despite these risks, Israel's financial institutions are in a relatively strong position.