Weak residential investments and a tight labor market are expected to keep inflation elevated

ISRAEL - In Brief 23 Jun 2024 by Jonathan Katz

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Geopolitics: Israel continues to operate in Rafah targeting Hamas operatives and tunnels, but the army says this part of the operation will end in about two weeks’ time. Attention is currently focus on the Northern border with the low-level conflict with Hizballah continuing and Israel threatening to commence a ground operation. Currently, no cease-fire negotiations appear to be progressing. Saturday night witnessed large demonstrations against the government with a large one planned for Thursday. Labor market remains tight Narrow unemployment held steady and low at 3.4% in May (SA), but broad unemployment creep higher to 4.0% from 3.8% in April (original data). Meanwhile, the number of vacancies increased by 0.5% in May. The demand/supply ratio in the labor market has pushed higher than pre-war level, supportive of wage pressure. The current account surplus remains strong, FDI less so The current account surplus in Q124 represents 5.2% GDP annual. Net FDI turned negative as Israeli investments abroad surpassed foreign investments in Israel. Basically, fundamentals are still shekel supportive, but financial flows on the back of elevated risks in Israel have been more dominant in the FX market. The shekel weakened by 0.3% last week against the basket, and weakened further Friday afternoon (after the official rate was set), due to growing concern regarding escalation in the North. Housing activity slows due to lack of workers Housing completions declined by 18% q/q in Q124 to an annual level of 51k units, below the estimated requirement of 60-65k units. • Without a solution to the lack of some 70 thousand Palestinian workers, residential investments will remain slow, put...