In a review published on Sunday, Bank Hapoalim highlighted several key political decisions that Israel will face in the coming weeks, including whether the government will advance to the second phase of the ceasefire agreement with Hamas, the Knesset’s deadline to approve the government budget by the end of the month, and ongoing efforts to remove the attorney general from the government.
Analysts note that Israeli markets, which have already endured significant challenges over the past year, are now increasingly affected by global economic developments. US President Donald Trump remains a dominant newsmaker, while even Germany has broken from its long-standing tradition of maintaining a zero budget deficit.
Household spending trends
At the start of the year, household consumption declined following a surge in purchases during the fourth quarter, which took place ahead of scheduled tax increases. Despite this, overall consumption levels remain high.
The consumer confidence index reached its highest level in February in nearly two and a half years. This optimism is believed to be influenced in part by improved security conditions following the first phase of the ceasefire agreement with Hamas and the return of the hostages. However, this positive sentiment was dampened by the ongoing decline in financial markets and increasing prices, which have reduced household purchasing power.
Credit card purchases fell by 1.4% in January, though this was in comparison to December, when many consumers had made early purchases ahead of the VAT increase. Even with the January dip, spending levels remain strong, indicating continued consumer demand.
Wages and employment
Wage growth remained strong in December 2024, with the average wage increasing by 6.9% annually over the past two years. However, initial data from January suggests a significant slowdown in wage growth.
While some analysts caution that short-term factors may skew these figures, the broader labor market remains tight. Worker shortages persist in the services and manufacturing sectors, and wages continue to be a major factor preventing a decline in inflation.
Decline of shekel worth
The shekel fell by 2.2% against a range of currencies last week. This decline has been largely attributed to drops in the US stock markets. However, domestic factors such as military developments and the state budget are expected to play a larger role in influencing the currency over time.
Israel’s economic environment is now diverging from that of the US and Europe, raising questions about whether the country’s monetary policy will follow a similar trajectory. US economic growth is starting to slow, while Europe’s growth remains low. Israel, however, still reports strong consumption figures and a tight labor market.
Despite this, inflation in Israel remains higher than in both the US and Europe. While this is partly due to tax increases in January, those increases must be considered part of the broader economic impact of the war.
Interest rate projections
Markets have now priced in three interest rate cuts in the US this year, bringing rates down to 3.75% by year-end. In Europe, interest rates have already dropped to 2.5%, and markets anticipate one or two additional reductions by the end of the year. In Israel, markets expect two rate cuts, which would lower the interest rate to 4% by year-end—a level that is higher than in the US, a situation not seen in the last decade.
As Israel navigates a rapidly changing economic landscape, interest rate policy, inflation, and geopolitical stability will continue to be key factors shaping the country’s financial trajectory in the coming months.