Merrill Lynch today raised its 2012 GDP growth forecast for Israel from 2.7% to 2.9%, citing recent improvement in the global economy and resilience of the domestic economy in the first half of the year. Although it reiterated its 2.9% growth forecast for 2013, it warned of risks. It also pushed back its expectation of an interest rate cut by the Bank of Israel to 2% to the first quarter of 2013.
Merrill said that its growth upgrade for Israel is based on its better assessment of the US, eurozone and Chinese economies, all of which are important for the Israeli economy. It says that every 0.1 percentage point improvement in the US and eurozone economies boosts the Israeli economy by 0.2 percentage points and 0.1 percentage points, respectively. The reverse is also true.
The lower risks of a hard landing in China, which is increasingly important to the Israeli economy, also helps. Merrill Lynch says that China directly accounts for 4.5% of Israel's exports, as well as indirectly via exports to other Asian countries, which account for 20% of Israel's exports.
On the domestic side, Merrill Lynch said that the Israeli economy has been more resilient than it had expected, as the deterioration in surveys has not been fully translated into the real data. The purchasing managers index has indicated contraction since June and the consumer confidence index is falling steadily, but manufacturing production, driven by chemical products and electronic and industrial equipment, is rising. The labor market is solid.
Looking ahead, however, Merrill Lynch cautions that the early elections implies tighter spending in early 2013, compared to the otherwise election year motivated fiscal policy. On the other hand, "It also provides hope for a better mandate for the ruling Likud to pass further fiscal consolidations next year". Overseas risks to the Israeli economy are the US fiscal cliff and sovereign debt crisis in Europe.
Published by Globes [online], Israel business news - www.globes-online.com - on October 23, 2012
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