Political turmoil limits potential government measures to ease economic pressures
Business confidence is at its highest since January 2020, coming off the back of a strong economic recovery in 2021, and a booming stock market. However, there are clouds on the horizon: hikes in the benchmark rate will translate to higher lending rates, soaring energy prices will drive up input costs, and a weakening shekel will make imports more expensive. MNCs can thus expect higher business and operating costs. B2Cs will face challenging pricing decisions, particularly given the price sensitivity of the Israeli market and rising cost of living.
Naftali Bennett’s coalition has lost its majority, after its chief whip, MK Silman, resigned. This situation was further exacerbated when the Arab wing of the coalition temporarily suspended its membership following attacks on Muslim worshippers in Jerusalem. However, the opposition, led by Benjamin Netanyahu, failed to capitalize on the ruling coalition’s struggles, as it was unable to gather enough votes to dissolve the Knesset and call a new election.
Inflation reached 4% in April 2022, up from 0.8% in April 2021, driven by a tight labor market, a depreciating shekel, and soaring food and energy prices. The central bank has raised rates to 0.35%, with further hikes of up to 1.5% expected throughout the year. This pace of these hikes will be dictated by the performance of the shekel.
Bennett’s coalition will hang on—for now. While the immediate danger seems to have passed, further resignations remain possible, which would tip the coalition into minority territory. It also remains to be seen what legislation the government can pass without a majority, and measures to deal with increasing economic pressures could be delayed by political deadlock.
Consumer spending will continue to be affected by the increasing cost of living. Despite a comparatively low headline inflation rate, the costs of basics, such as food and transportation, are rising at a sustained pace, putting particular pressure on lower- and middle-income segments and raising the risk of social unrest.
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