Israel’s economy will see a recession next year as protests persist, says former central bank deputy governor

Fresh protests in Israel over a controversial judicial overhaul will deliver a significant slowdown to the country’s economy, according to former central bank Deputy Governor Zvi Eckstein.

Tens of thousands took to the streets earlier this week after the Israeli Parliament advanced efforts in a bill aiming to curtail the autonomy of the country’s Supreme Court.

And the fervent unrest, which started months back, will likely have a “huge impact” on the economy and its inflow of investments, Eckstein, who is currently a dean at the Tiomkin School of Economics, told CNBC’s “Capital Connection.”

It has also led to a “huge reduction” in investments in Israel’s high technology sector, which is a linchpin of the Israeli economy, he said.

“Most of the growth of the Israeli economy, about 40%, was generated by the high tech sector,” said Eckstein, highlighting that there is currently an 80% decline in investment in the country’s startup and growth companies.

According to a July report by the Start-Up Nation Policy Institute (SNPI), investments in tech firms for the first half of 2023 dropped 68% to $3.7 billion, marking the lowest rate since 2018.

Israel’s fintech sector, as well as enterprise IT, posted the biggest declines, plunging more than 80% year-on-year, the report also showed. SNPI had attributed the slowdown in investment as part of a global trend.

A separate report by Israeli private equity investment group Viola, had also stated that Israel ceded its ranking as the world’s fifth best-funded tech ecosystem to become the 10th best.

Eckstein also noted the lack of growth in the Israeli stock market over the last half a year. The country’s Tel Aviv Stock Exchange dropped almost 10% year-to-date.

“Within a year, we will see a big, large slowdown in the economy … I see a huge drop going all the way to a recession in the next year,” he forecasts.

Israel’s economy grew 6.5% in 2022. But come the second half of 2023, a slowdown to about 2% or even less is on the cards, Eckstein said. 

And no light at the end of the tunnel is in sight, especially as the government continues its attempt to pass the bill, which would be destabilizing for the economy, said the former central bank governor.

The law would alter Israel’s judicial system by granting sitting governments total control of judicial appointments. Some commentators believe it would also weaken the country’s Supreme Court to the point of ending its role as a check on executive and legislative power.

The Israeli shekel is currently trading at 3.637 against the dollar, weakening slightly since the start of the year when plans of the reforms were first announced. In early June, the shekel plunged to a more than three-year low of 3.753 per dollar, according to data from Refinitiv.

Earlier in April, Israeli Prime Minister Benjamin Netanyahu dismissed concerns about compromised investor confidence — calling it a “momentary problem.” He had also affirmed that the fundamentals of the Israeli economy are “very powerful.”