The Bank of Israel said that risks to Israeli banks and insurance companies have returned to near-crisis levels, while many small businesses are still struggling due to the effects of the pandemic.
The bank released its twice-yearly Financial Stability Report on Wednesday. In the report, the bank’s economists analyze the resiliency of Israel’s financial system against leading risk factors.
The most recent report focuses on the ongoing recovery from the pandemic. During the first half of the year, Israel’s vaccine rollout allowed a return to near-normalcy and the reopening of businesses, albeit with ongoing challenges, while other countries underwent a slower recovery.
Risk factors in the report include the climbing virus infection rate, inflation and financial asset prices.
The bank also warned of an increase in investors’ risk appetite amid narrowing corporate bond spreads and increasing equity prices.
The bank said that risks declined in the first half of 2021, due to the strong recovery in economic activity after virus restrictions were lifted. Reopenings in the United States and Europe have also benefited Israel’s economy.
Emerging economies are still contending with the virus crisis, however, and the Delta variant is surging in Israel and elsewhere, which may portend more lockdowns and elevated financial risk, especially for small businesses, the bank said.
The business sector has seen a strong, but unequal, recovery, with mainly small businesses still struggling to regain their footing. Many small businesses, in an array of industries, have not yet returned to their pre-pandemic employment levels.
Many larger, public companies “did not suffer any harm to their profitability overall in 2020,” the bank said, especially in the areas of manufacturing, trade, and information and communication.
Resilience risks to banks and insurance companies have nearly returned to pre-pandemic levels. The financial sector saw losses early in 2020, but became profitable again later in the year. Some risks to profitability remain, but uncertainty is down.
Policymakers around the world are mainly contending with supporting economic activity amid the pandemic and an increase in asset prices, the bank said.
Central banks in many countries are continuing with lax monetary policies to stimulate economic recovery, which has boosted inflation, including in the US, the Bank of Israel said.
Bank of Israel chief Amir Yaron on Tuesday warned against a government lockdown to contain the Delta variant, but said the bank had funds to cope with such a scenario. On Monday, Finance Minister Avigdor Liberman also expressed opposition to the prospect of a lockdown, warning of the economic harm it would cause.
A one-month lockdown would shave 0.5 percent off of Israel’s economic growth for the year, according to the bank’s estimates, Yaron said. In July, the bank forecast GDP growth of 5.5% in 2021, and 6% in 2022.
He also said Israel was “not seeing any risk of inflation eruption,” he said. “Our current view is that most of the forces right now are fundamentally still transitory forces.”
Despite several months of near-normalcy, Israel’s economy is still recovering from the effects of the first year of the pandemic. Unemployment remains high, even though the government ended most pandemic support measures, and salaries are still balancing out as workers return to the labor force.