Economists forecast unemployment surge, Q4 contraction amid war

Experts anticipate a surge in unemployment rates and a double-digit contraction in domestic product for Q4 2023, attributing these trends to uncertainties surrounding the war. In their recent analysis, Leumi’s Chief Economist Dr. Gil Michael Bafman, and Interest Rate Strategist Dodi Reznik, shed light on the macroeconomic landscape, providing crucial insights into the prevailing challenges and potential shifts in monetary policies.

Firstly, the job market is taking a hit. Unemployment rates are shooting up, and there’s a prediction that the overall economy (what experts call the domestic product) will shrink by a whopping double-digit percentage in the last quarter of 2023. The war is causing uncertainties that affect how many Israeli residents can find work and how much businesses are willing to spend.

Despite this gloomy outlook, the experts are cautiously optimistic. They think we might see a slow recovery, with the economy growing by about 2.4% by the end of next year.

As the war continues, experts predict that deflationary effects will gain momentum, contributing to a slowdown in the annual inflation rate. A significant consequence of the war is expected to be a moderation in rental prices in the coming months, due to a decline in the purchasing power of tenants. That lower purchasing power is a consequence of lower economic activity and the reliance of hundreds of thousands of workers on unemployment benefits.

Regarding monetary policy, the report speculates on the immediate future of the Bank of Israel’s interest rate decisions. While it is likely that the interest rate will remain unchanged in the upcoming announcement, experts predict an impending interest rate cut at the beginning of January.

Too many “what ifs” for a conclusive picture

Pushing back against Bafman and Reznik’s forecasted unemployment surge, TAU Economist and head of the Shoresh Institution for Socioeconomic Research Dan Ben-David, provided a comprehensive view of the economic repercussions of the war in Israel.

“There are so many what-ifs in that expectation that it’s anybody’s guess,” he said, noting that the mobilization of 360,000 reserves and the displacement of 130,000-200,000 Israeli refugees, coupled with volunteers diverting their focus from work to aid those affected, have created a complex employment landscape.

While some sectors, like haredim and Arab Israelis, are less affected, the absence of hi-tech workers, comprising only 10% of the workforce but driving half of Israel’s exports, has disproportionate consequences. “Wide swathes of Israel’s business sector benefit financially from hi-tech well-being, so these too are being negatively affected. When people are uncertain of their incomes, they spend less and that has a compound effect on the others who depend on their spending,” he explained.

Highlighting the global context, Ben-David noted that Israel’s hi-tech, previously resilient, faced challenges in 2022, exacerbated by the government’s strong and controversial push for hasty judicial reform.

“If, when this war ends, there will not be a major political course correction, then our goose that lays the golden egg may take a hit that it will be unable to recover from – and with them, the rest of Israel’s economy,” he said. “The unparalleled protests against the most extreme and incompetent government in Israel’s history during the first nine months of the year will be child’s play compared to the tidal wave that will wash it away at the end of this war.”

The duration and intensity of the war remain key concerns, especially regarding a potential front with Lebanon. Boson raises questions about Israel’s military capacity without relying on reserves and the potential threat from Hezbollah’s substantial missile arsenal.

“In short, we are still way too early in the process, with so many unknowns, that there is no way to be able to get any accurate estimate of the losses still ahead. In light of all this huge uncertainty, my guess is no better than anyone else’s, but here it is nonetheless,” he admitted. “Since its birth, Israel has displayed an ability to come together and defy tragic predictions. I believe that we will do so again.”