Has Israel's business sector stopped growing?

The Israeli business sector did not grow in 2023, according to the Melnick State of the Israeli Economy Index. The index indicated that the level of activity in the business sector during April was comparable to that of November 2022. This slowdown, which initially emerged in the final quarter of 2022, can be attributed to negative global developments and was exacerbated by attempts at government legislation.

Of particular concern is the stagnation in private consumption, as reflected by the revenue in trade and services. This indicator, which serves as a measure of domestic demand and private spending, demonstrated no significant growth. Moreover, the industrial production index, which provides insights into the supply side of the business sector, continued to experience significant fluctuations without a clear trend, signaling persistent weakness.

While the import index, consisting mainly of inputs for domestic production, did not decline in April following a continuous decrease since October 2022, it still remained 11.4% lower compared to the same month the previous year. This suggests the potential for a future decline in business sector activity.

Furthermore, the number of employee positions within the business sector has once again decreased, indicating that the growth slowdown is now impacting the labor market. This concerning trend further underscores the challenges faced by the Israeli economy.

Analyzing the components of the April Index, several key factors contributed to the overall picture. The industrial production index experienced a 2.7% decrease in March, following a 4.5% increase in February. The revenue in trade and services, on the other hand, witnessed a 1.5% increase in March, following a 0.5% decrease in February. The import index saw a 0.5% increase in April, following a 1.0% decrease in March. Lastly, the number of employee posts in the business sector decreased by 0.4% in February, following a 0.7% decrease in January.

Professor Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel-Aviv University, noted that a challenged hi-tech sector is among the most significant hurdles facing the business market.

“Our economy’s primary engine of growth – far more so than any other economy in the world – is hi-tech. This sector began a downturn world-wide towards the end of last year, so definitely not good for an economy as dependent as ours on this sector,” he said.

“As though this were not enough, our new government took a sledgehammer to Israel’s democracy,” he added, referring to the current government’s attempt to pass legislation that would severely undermine the legitimacy of Israel’s High Court.

“As a rule, sectors most affected by governmental inclinations toward non-democratic norms are those heavily dependent on capital inflows from abroad – which then produced a second whammy for Israel’s hi-tech sector, though this one completely self-induced by our government,” Ben-David said.

The struggle against inflation

Lastly, he touched upon Israel’s recent struggles against ever-rising inflation. “Since our government has been too focused on passing a budget that raids the treasury in order to buy off the coalition partners, that leaves the only sheriff in town, the governor of the Bank of Israel.  Since he cannot restrain the government’s spending, his primary tool for dealing with inflation is to raise the interest rate – and that further dampens economic growth by stifling investments,” he concluded.

The Melnick State Index highlights the pressing need for policymakers and industry leaders to address the challenges faced by the Israeli economy. Efforts to mitigate the negative impact of global developments and address potential legislative barriers are crucial to revive the business sector's growth and prevent further economic decline. Additionally, measures to stimulate private consumption and promote industrial production will play a pivotal role in reinvigorating the economy and stabilizing the labor market.

As the Israeli economy navigates these challenging times, stakeholders will closely monitor future trends and indicators, hoping for a reversal of the current stagnation and a return to robust economic growth.