Two macro figures that are worrying for the Israeli economy hit us recently. The first was the Consumer Price Index reading for July, which showed inflation running at an annual rate of 3.2%, which is above the Bank of Israel’s target range, and higher than market forecasts.
This is contrary to the trend of moderating inflation in the US and Europe. The second figure is the 1.2% annualized growth rate in the second quarter, dramatically lower than market expectations. After the growth figure was released, one after another, four major US banks issued reviews of the Israeli economy. These contained plenty of warnings, but all of them stated that, if steps were taken to stabilize the economy, it would go back to being as attractive as it was in the past.
Such steps are not, however, forthcoming. Measures to maintain the fiscal framework, for example. We received a fresh example this week, in Minister of Finance Bezalel Smotrich’s campaign to finance continued evacuation of residents of Israel’s northern and southern border areas, and the budget for reserve soldiers. Since the beginning of the year, the Ministry of Finance’s forecast for the fiscal deficit in 2024 has been 6.6% of GDP. Citi finds that unconvincing; its estimate is 8.5%. It also believes that the Ministry of Finance itself is unconvinced, citing officials as saying that there is a risk of a larger fiscal deficit this year because of the escalation in the north and other factors.
Morgan Stanley also noted the rise in the deficit, and cut its growth forecast for Israel for this year, as did JP Morgan, Goldman Sachs and Citi. Citi also warned about Israel’s credit rating and the quality of the institutions and governance in Israel.
The war and the geo-political risks are not the whole story. Even the Governor of the Bank of Israel wrote this week, black on white, that there were factors beyond those. To reassure the markets even a little while the fighting rages, the least that can be done is to adopt a responsible policy and to advance the 2025 budget, even if it contains painful measures. The alternative is liable to be far more painful and costly.
Published by Globes, Israel business news - en.globes.co.il - on August 22, 2024.
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