Israel Bank Releases First Chapter of 2024 Annual Report
Investing.com — The Bank of Israel has published the first chapter of its 2024 annual report, providing insights into the country's economic situation amid ongoing war. The full report is scheduled for release on March 31, 2025.
Economic Impact of War in 2024
The war has had a significant impact on the economy, primarily due to supply constraints, including labor shortages. Gross Domestic Product (GDP) grew by only 0.9% compared to 2023, while business output contracted by 0.8%. Despite some recovery as the war intensity declined, GDP and most of its components remained below pre-conflict levels throughout the year.
Global Economic Environment
The report highlights that the global environment remained relatively favorable in terms of demand, as seen in global GDP growth and increased world trade. Inflation in developed economies eased, and central banks lowered interest rates.
However, the easing of supply restrictions in Israel was gradual due to continued bans on Palestinian workers' entry and the inability of many reservists and residents in conflict zones to return to work.
Government Measures and Fiscal Policy
To balance the immediate needs of the war with maintaining a sustainable fiscal path, the government funded ongoing war expenditures by increasing public debt, which surged to about 68% of GDP. Restrictive fiscal measures were also introduced, mainly in the 2025 budget, to offset the expected permanent increase in war-related expenditures.
Inflation and Interest Rates
Annual inflation in 2024 stood at 3.2%, slightly above 2023, due to recovering demand and persistent supply constraints, contrasting with the global trend of easing inflation. Given financial market stability, moderating inflation, and reduced war intensity, the Bank of Israel cut interest rates by 0.25 percentage points at the beginning of the year. Throughout 2024, the rate remained at 4.5% to support market stability amid ongoing conflict and bring inflation back within target levels.
Labor Market and Real Estate
Labor shortages resulted in a tight labor market, causing rapid increases in nominal wages and unit labor costs. The construction sector faced a severe worker shortage, leading to longer completion times, slower project finalizations, and higher contractor financing costs. Housing demand initially dropped due to the war but later rebounded, with transaction volumes, mortgage issuance, and home prices all rising.
Market Volatility and Economic Risk Premium
Economic risk premiums surged significantly at the onset of the war and showed volatility with a moderate upward trend for most of the year, driven by increased geopolitical risks and a sharp rise in the debt-to-GDP ratio. However, by the end of 2024, market conditions improved as a ceasefire agreement in northern regions reduced security risks. The shekel appreciated, local stock prices soared, and economic risk premiums declined, though they remained above pre-war levels.
Challenges and Future Outlook
The Bank of Israel's report also highlights the increasing challenge of addressing fundamental economic issues such as low labor productivity and high poverty rates through public investment in human capital and infrastructure. Due to the war and its expected long-term impact on public spending, the economic necessity of integrating a larger population into the labor market and sharing the military service burden has become even more pressing.
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