Israel's economy is "ready to roar", according to Barclays Capital analysts Daniel Hewitt, Koon Chow, and Arko Sen. Finding that Israel passed through the global recession with only light damage, the analysts say the economy is ready to resume growing.
The analysts see three main reasons why Israel made it through the recession better than other economies. Israel's financial sector was not as vulnerable, "radical" monetary loosening by the Bank of Israel limited a decline in domestic demand, and that decline was also offset by improvements in net exports.
Barclays expects Israel's real GDP to grow 2.9% in 2010 and by 3.1% in 2011, with gross public debt falling to 76% of GDP in 2010, and 74.3% of GDP in 2011.
Barclays predicts that the shekel-dollar rate will fall to NIS 3.50/$ by the end of 2010, and will fall even further to NIS 3.40/$ by the end of 2011.
Barclays seems impressed with the Bank of Israel's handling of monetary policy during the recession. "Monetary policy was put on emergency loosening rates lowered to 0.5% and M1 money growth exceeding 60%. While this is similar to monetary policies in the G-3 countries among others, there are large differences. Inflation never dropped as much in Israel and growth declines were mild. Israel has had negative real interest rates since 2008. Thus, Israeli monetary policy has been pre-emptive rather than reactive. It is possible, even likely in our opinion, that if the Bank of Israel had not loosened monetary policy this much, the recession in Israel would have been deeper and could have experienced deflation (perhaps like Chile, Czech, Cyprus, and Malaysia). The Bank of Israel seems to have succeeded in counter-cyclical monetary policy."
The analysts note that Israel's fiscal policy played a smaller role in combating the effects of the recession, with what the analysts call a modest spending stimulus. However, the analysts do note Israel's falling government debt, and say that the current government is committed to responsible public finances and lowering public debt. "The public debt level is currently 77% of GDP, down from over 100% several years ago and Israel has benefited from an improved expenditure structure (for instance, military spending has decreased as a share of GDP). This cut in spending provides more room for private sector expansion. Still, spending pressures do exist, and there is some risk that expenditures will increase to take up the slack created by rising tax revenues."
The analysts warn that as a consequence of the "radical monetary policy" there is a higher inflation risk, but that the Bank of Israel appears committed to a process of gradual interest rate hikes which it says will bring rates to 3% by the end of 2010. They note that the shekel's appreciation should help to lower inflation.
Published by Globes [online], Israel business news - www.globes-online.com - on December 10, 2009
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