Despite political instability, Israel in healthy state for coming economic storm

Israel is expected to grow in 2022 by 4.8%, compared with 4.9% in the previous forecast – a minor decline that most Western countries would be more than willing to accept.

VARIOUS ISRAELI banknotes are displayed for an illustrative photo. The economy is well on its way to the pre-pandemic standards of budgetary discipline. (photo credit: NIR ELIAS/REUTERS)
VARIOUS ISRAELI banknotes are displayed for an illustrative photo. The economy is well on its way to the pre-pandemic standards of budgetary discipline.
(photo credit: NIR ELIAS/REUTERS)

The World Bank lowered its global growth forecast for 2022 from 4.1% to 2.9%, following growth of 5.7% in 2021. The more distant future does not bode well, either, with a growth forecast of 3% for both 2023 and 2024.

In addition, the World Bank lowered the US growth forecast to 2.5%, compared with the previous forecast, which predicted the growth of the world’s largest economy to 4.2% in 2022.

Even China, the second-largest economy in the world, which is narrowing gaps with the US, is not escaping the global crisis. Its growth expectation is 4.3%, compared with 8.1% in 2021.

All of this means that growth in emerging markets and emerging economies is expected to be cut by almost half in the current year, compared with 2021, 3.4% versus 6.6%.

Israel's economic forecast

The day after the World Bank’s publication, the OECD published its growth forecasts, which indicated a growth of 3% in the global economy, compared with 4.5% in the previous forecast and 2.75% growth expected in 2023.

But Israel, according to the OECD publication, is expected to grow in 2022 by 4.8%, compared with 4.9% in the previous forecast – a minor decline that most Western countries would be more than willing to accept.

The World Bank and the OECD have highlighted the negative impact of Russia’s invasion of Ukraine, which is one of the main factors in the slowdown in the world economy. The war between two of the largest exporters of goods in the world caused a spike in energy and food prices, which accelerated, among other things, high inflation and caused significant damage to world growth.

Other reasons for the global inflation outbreak can be attributed to the excess demand that came as a result of the restrictions and closures imposed due to COVID, along with a shortage of raw materials due mainly to material disruptions in supply chains, mainly from China, which is constantly experiencing closures, with the authorities fighting stubbornly and harshly in order to eradicate the coronavirus, which refuses to surrender.

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Alarming inflation figures

INFLATION FIGURES recently released by the US showed a sharp and alarming jump of 8.6% on an annualized basis, an inconceivable number that is causing sleepless nights for Federal Reserve Chairman Jerome Powell, who received a call from the incumbent US president to curb inflation. Raising interest rates may moderate US demand and thus moderate inflation rates, but it may also trouble firms that need higher-interest credit and will have to deal with consumers who prefer savings over product consumption.


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In the sector of energy prices and commodities, the US president himself has the power to act: Joe Biden does not seem to have an influence on China’s decision-making policy, but he seems able to persuade the Saudis to add more oil to the market, and he will visit Riyadh next month. This step will moderate rising energy prices.

Also, in the ongoing war between Ukraine and Russia, Biden can try to reach a settlement between two of the largest suppliers of goods in the world, which seem to have become disenchanted that the end is not in sight. This step can also lower energy and commodity prices.

The rate of increase in the US consumer price index, along with the internalization that the process of raising interest rates may be longer and sharper than expected, led to another wave of declines in the markets. The Nasdaq index has already declined more than 30% since the beginning of the year.

Europe, which is very sensitive to rising energy prices, is experiencing an increase in inflation, and Germany has set a 50-year high with the price index jumping to 7.9%. The declines in the leading stock indices were not long in coming, with the DAX having declined about 17% since the beginning of the year. The European Central Bank is expected to raise interest rates for the first time in more than a decade.

The flattering growth forecast for Israel of 4.8% and the expected 4% inflation (which is significantly lower than other Western countries), as well as a budget surplus since the beginning of the year, a deficit that has fallen to zero on an annual basis and particularly low unemployment, put the Israeli economy, despite its political instability, at a much more encouraging starting point in relation to Western countries for the coming economic storm.

The writer is director of the Israeli Securities Desk at Mercantile Bank.