Israel is currently facing a challenge in terms of falling disposable income, which could have a significant impact on the economy in the coming months. 

According to the Central Bank’s Information and Statistics Division, about 50% of households are in the red on their current accounts, with an average overdraft of more than NIS 15,000. Furthermore, more than a quarter of the current accounts were defined as being chronically overdrawn during the twelve month period, with an average overdraft of more than NIS 20,000.

According to experts, the rise in interest rates is one of the primary causes of the public’s overdrafts, along with the rise in the cost of living, as indicated by the inflation data. In the coming days, the Bank of Israel’s monetary committee will decide whether to raise the interest rate for the ninth consecutive time.

The current cycle of interest rate increases will complete one year, when the Bank of Israel interest rate jumped from 0.1% in April 2022 to 4.25% today. The current consensus is 0.25%, but 0.5% remains a possibility. The reason for that is that the inflation refuses to converge back to the Bank of Israel’s target (1%-3%) and remains around an annual rate of 5.4%.

In light of the fact that interest rates on loans taken out by the public have increased over the past year, the disposable income of Israeli households continues to decline. For example, for a typical family who purchased an apartment with a mortgage of one million shekels, the monthly payment have increased by approximately one thousand shekels. This is crucial, as the Israeli economy is highly dependent on consumer spending, and any decline in this area will result in a rapid economic slowdown.

And what about another crucial aspect of the Israeli economy’s health – private consumption? According to data from the Bank of Israel, the number of credit applications decreased. In the first half of 2022, the growth rate of non-housing credit was approximately 14% (NIS 13 billion). However, in the second half, the growth rate was significantly reduced, resulting in a 7% annual increase in credit (NIS 2 billion). Although growth is still being reported on this front, the trend is not the same as it was during comparable periods in the past. Therefore, experts anticipate that a decline in credit demand will soon begin to impact private consumption.

Some Israeli investment firms are already anticipating a slowdown in consumption. Alex Zebzinski, Chief Economist at the Meitav Investment House, explains this by means of the decrease that is already occurring in the import of consumer goods, which has been on a downward trend for months. “There is a noticeable decrease in the import of consumer products, a rather rare event in itself. The decrease in the import of consumer products indicates the expected weakening of private consumption.”