Slowing Israeli economy continues to face headwinds in July 2023

The latest report on the Israeli economy from the Melnick State of the Economy Index reveals that the country's economic conditions remained stagnant in July 2023, with ongoing concerns regarding the business sector's sluggish activity and a notable deceleration in growth during the second quarter.

The Melnick Index, developed by Prof. Rafi Melnick of Reichman University, provides real-time insight into Israel's economic activity. As a coincident indicator, it highlights the level and turning points of economic trends. Given Prof. Melnick's background and expertise in economics, his index serves as an important tool for policymakers, analysts, and business leaders to understand the dynamics of the Israeli economy.

Despite recent efforts to stimulate economic activity, the Melnick State of the Israeli Economy Index reported an unchanged reading for July. The continued slowdown in the business sector's economic activity is a cause for concern, indicating a persistent weakness in the heart of Israel's economic landscape. Particularly noteworthy is the significant deceleration in economic growth experienced during the second quarter, which underscores the challenges the economy is grappling with.

What is behind Israel's economic slowdown?

According to the report, this slowdown is attributed to a combination of external and internal factors. Globally, the sluggish pace of economic activity has cast a shadow over Israel's growth prospects, while domestically, attempts to implement radical changes to the legal system in Israel have introduced a degree of uncertainty that might be affecting investor sentiment and business operations.

Several key indicators highlight the extent of the economic slowdown. One of these is the revenue in commerce and services, a gauge of domestic demand and private consumption. This metric experienced notable fluctuations, including a sharp decrease in the latest reporting period. This decrease suggests a reduction in consumer spending and highlights the potential impact on businesses reliant on local consumption.

Furthermore, the industrial production index, which reflects the supply side of the business sector, has also been on a downward trajectory. This is indicative of a growing weakness in industrial activity, which could be a result of reduced demand and various operational challenges. The import index, while showing a modest increase in July, has yet to offset the ongoing decline observed since October 2022, signaling potential challenges in the production process.

In terms of the labor market, the report shows a marginal increase in the number of employee posts in the business sector. However, this uptick fails to counteract the broader trend of slowdown that has persisted since the previous year. This points to a persistent weakness in the job market, further aligning with the broader economic narrative of a sluggish economy.

The components of the July Index provide more granularity on the economic indicators contributing to the current landscape. Notably, the industrial production index recorded a 1.0% decrease in June, following a 1.7% decline in May. Additionally, revenue in commerce and services experienced a concerning 2.3% decrease in June, following a modest increase of 0.8% in May. This volatility underscores the uncertainty businesses in Israel are currently navigating.

The report attributes some positive developments as well, such as a 2.0% increase in the import index in July. However, this uptick comes after a 3.2% decrease in June and does not fully offset the preceding decline.

The Economy Index for July paints a picture of a persistently sluggish Israeli economy, grappling with challenges from both domestic and international fronts. The slowdown in business sector activity and the significant growth deceleration in the second quarter warrant attention from policymakers and stakeholders alike. As Israel navigates these headwinds, the root causes of the slowdown must be addressed in order to properly foster a more robust economy moving forward.