The Israeli economy faces the risk of stagflation, which is a combination of slowing economic growth in conjunction with high rates of inflation and unemployment. The Israeli website Calcalist reported that the government’s promises to combat high inflation did not produce the desired results.
A report by the website indicated that 40% of the recent increase in wages did not translate into an increase in purchasing power, and this was attributed to the fact that the increase was less compared to the increases witnessed in inflation rates.
The website warns that the economy is about to increase the value-added tax in an attempt to reduce the worsening budget deficit as a result of the continuing war on the Gaza Strip, which will increase the severity of the recession and raise the inflation rate.
The average nominal wage in the Israeli economy is 14,000 shekels ($3,756), according to the Israeli Central Bureau of Statistics. However, the website believes that praising this increase is misplaced, because it conceals a more serious economic threat to family economies, due to the inflationary spiral between wages and prices that continues to rise.
Calcalist says that, with a closer look at the numbers, we find that while the nominal wage of Israeli workers has risen by 7.25% since the formation of Benjamin Netanyahu’s government, which includes the hard-line Finance Minister Bezalel Smotrich, the real wage – taking into account the rise in prices – has risen by only 4.3%.
Significant rise in food prices
In a comparison conducted by the newspaper on the top 10% of the most inflated items since January 2023, which primarily includes food items such as fresh fruits and vegetables, eggs, sugar and its substitutes, fish, poultry, dairy products, cream, cocoa and beef, these items witnessed an increase in their prices ranging from Two to five times the general inflation rate of 3.6% for the same period.
Internationally, Israel ranks fourth in the OECD in terms of food price inflation, with an annual rate of 5.35%, which is well above the organization’s average of 4.8% and well above the European average of 1.5%.
What is most worrying – according to the site – is that food price inflation in Israel decreased by 40% compared to last year, while the European Union recorded a 90% decrease.
The latest OECD data show that the Israeli economy will grow less than expected before the war, by only 1.9%, rising to 4.6% in 2025.
As for inflation rates, the organization expected that their average this year in Israel would reach 2.5%, compared to 2.7% expected by the Central Bank of Israel.
Neglect and structural issues
The Calcalist report points to continued neglect by successive Netanyahu governments since 2009, suggesting a starting point where Israel was comparable to the OECD average in terms of price levels.
The report issued by the organization confirms that despite the high prices in Israel, the per capita GDP does not exceed 96% of the average in developed countries, which indicates structural problems such as insufficient infrastructure, labor market rigidity, regulatory burdens, and high Government debt, high trade barriers, low competitiveness, and insufficient investments.
Rising risks of stagflation
Calcalist warns that the risk of stagflation – a combination of low economic growth and high inflation – is becoming increasingly clear. This economic situation complicates the role of the Bank of Israel, hindering its ability to reduce interest rates, according to the newspaper, which is crucial for economic recovery and promoting growth.
The Calcalist report criticizes the current government’s lack of substantive intervention in reducing the high costs of living, despite its promises before the elections to reduce living expenses. The continued rise in prices and neglect of structural reforms will only exacerbate the inflation problem, increasing pressure on the Israeli economy and families.
Israel’s war on the Gaza Strip significantly affected economic growth in the last 3 months of 2023, more than expected, as the Israeli Central Bureau of Statistics – in its third estimate – stated earlier that the economy contracted by 21% in the last quarter of 2023 on the basis of Annually compared to the previous quarter.
This came after a 19.4% decline in the initial estimate, which was revised in March to a 20.7% contraction.
Israel launched its ongoing war on the Gaza Strip on October 7, and led to sharp declines of 22.5% in exports, 26.9% in private spending, 67.9% in investment in fixed assets, and 42.4% in imports, in the last quarter. .
However, government spending in Israel jumped 83.7%.
The office reported in its report that the annual inflation rate rose more than expected to 2.7% in March from 2.5% in February.