NEW YORK – Labor shortages, sticky inflation, and a ballooning wartime bill could undermine the economy’s long-term growth unless the government matches military spending with aggressive investment in education, infrastructure, and workforce inclusion, Bank of Israel Gov. Amir Yaron warned at the Jerusalem Post Annual New York Conference last week.
Although the economy has rebounded from the October 7 war shock far more quickly than expected, Israel still faces these challenges, he said.
Addressing investors and community leaders, Yaron painted a before-and-after portrait of the economy.On the eve of the war, he said, Israel was “a poster child”: debt-to-GDP had fallen to 60%, unemployment sat near record lows, and inflation was gliding back into the Bank of Israel’s one-to-three-percent target.
Hamas’s October 7 massacre sent output plunging by an annualized 21% in the fourth quarter of 2023, but the very next quarter, it rebounded 17%, and fresh first quarter data released hours before Yaron’s talk showed a 3.4 percentage growth – roughly Israel’s long-run potential.
Consumer resilience surprised even the central bank. Credit card spending sank more than 30% in mid-October yet regained its pre-war path within weeks.
“If you want a table at a top restaurant, you might need my secretary,” the governor said, noting that demand has stayed strong even as supply remains strained by the absence of 175,000 Palestinian workers and thousands of Israelis on extended reserve duty.
These gaps, he said, are visible in soaring job vacancies and a nascent rise in housing prices as construction slows.Yaron disclosed how the Bank of Israel moved quickly to prevent a financial panic. When markets opened on October 8, the shekel was sliding. The bank then announced it would sell up to 30 billion dollars of reserves and provide $15b. In foreign exchange swaps.
'We entered this crisis strong and we’re climbing back'
“We didn’t defend a particular rate, only market functioning,” he said, adding that decisive liquidity injections stopped a market shock from morphing into a systemic crisis.
The shekel, after touching NIS 4.08 to the dollar, has settled into a NIS 3.55–3.80 range, and Israel’s credit default swap spread has narrowed sharply since a November ceasefire on the northern border.
As for the hi-tech sector, 50% of its exports and over a third of its tax revenue initially froze, but venture funding is already back to 2019-20 levels.
“In spite of everything going on, the money for early-stage companies is flowing again,” Yaron said, citing headline deals at cybersecurity firm Wiz and defense-oriented start-ups. Diversification into agricultural technology and food security, he added, creates fresh demand across Abraham Accords markets.
Inflation is the current irritant. April’s consumer price index jumped 1.1% on the month, two-thirds of it from higher airfares, pushing annual inflation to 3.6%.
The governor signaled caution on interest rate cuts: “We have to be patient, but if the trend holds, we expect inflation to ease back inside target later this year.”
The heaviest weight, however, is fiscal. War costs have already reached about a quarter-trillion shekels, lifting the debt ratio to 68%.
Two consolidation packages totaling 2.5% of GDP will keep debt from spiraling, Yaron said, but he pressed the government to channel more of its budget toward “growth engines” such as classrooms, rail lines, and programs that bring ultra-Orthodox men and Arab women into the workforce.
Without such investment, demographic trends point to a shrinking pool of skilled labor and chronically low productivity.
“We entered this crisis strong and we’re climbing back, but resilience alone won’t solve the long-term challenges,” Yaron said.
“Scout Israel, put in the time, and you’ll find the right opportunity. Just make sure we’re also laying the tracks so that the train can keep on moving.”