Israel’s economic situation seems very unclear. The Knesset has entered its long summer recess, and will not convene again until October. When that happens, it is not certain whether the judicial overhaul will continue or not, and how the economy might respond either way. The international credit rating agencies have issued warnings about the political uncertainty, and indicated that it might affect Israel’s rating.
Despite the uncertainty, at least one prominent US banker is confident about Israel’s economy, and sees the situation improving substantially. Bernard Mensah, president of International at Bank of America, talks to "Globes" about how the bank perceives the situation in Israel.
Bank of America is one of the biggest investment banks in the world, and the second largest bank in the US in terms of market cap. It serves customers in more than 100 countries, among them, of course, Israel. In his interview, Mensah refused to comment on the current crisis in Israel, but a report by Bank of America analysts published in early July stated that, in the short term, the volatility in Israel could be expected to continue, and that the depreciation of the shekel created a risk of further interest rate hikes by the Bank of Israel.
The report stressed that both supporters and opponents of the judicial overhaul in Israel had an interest in compromise and consensus.
"The economy in Israel is dynamic and driven by the technology industry. Nevertheless, as in many other countries, the global slowdown affected Israel as well, and the technology space," Mensah began when asked about the situation in Israel.
"Our research team sees a slowdown in economic growth this year, to a level of 2.5%," he says. "Despite Israel’s special social and political challenges, this is still faster growth than we are seeing in many other parts of the world."
The growth forecast by Mensah and the Bank of America analysts is not high, and if Israel’s natural population growth rate of about 2% annually is taken into account, then GDP growth per capita is much lower.
Moreover, this is a lower forecast than the latest revised forecast by the Bank of Israel in July, which projects 3% growth for the Israeli economy in 2023.
The Bank of America forecast is, however, in line with that of Morgan Stanley, and higher than that of S&P, which sees a very low growth rate for Israel this year of 1.5%, which would make growth per capita negative.
"When the global forecast improves, Israel will be able to restart its economy. The country’s economy is cooling, inflation is falling, and economic ties in the region are on an improving trend. Fortunately, the inflation shock is small, and much more limited in comparison with other economies, and so the adjustments required will be less painful. Since the labor market is still tight, our economists see a softer landing in Israel, particularly in comparison with many other countries," Mensah says.
Commenting on the Bank of Israel’s actions to bring the rate of inflation down, he adds, "While the Bank of Israel has succeeded in tightening its policy and turning the inflation trend downwards again, inflation is still high. Like other central banks around the world, we think that the Bank of Israel will exercise patience in reducing interest rates. Our analysts do not see any cuts this year, and in their view the inflation rate will be 3.6% by the year end." Here, Bank of America’s forecast is actually similar to that of the Bank of Israel, which sees an inflation rate at the end of the year of 3.5%.
"US market critical to Israeli companies
In the interview with him, Mensah stresses Israel’s strength as a country that generates startups producing innovation as added value. "Israel is known as ‘the startup nation’. This is mainly thanks to its strong human capital, large government spending on research and development, leading universities, an entrepreneurial culture, and innovative technology.
"In the past two decades, Israel has become a world center in several technological segments, among them autotech, cyber, foodtech, cleantech, fintech, and Internet. The US market is the most important market for Israeli companies, and is critical for the continued success and growth of these companies."
Where do you see new investment opportunities? What will Israel’s next big opportunity be?
"The Israeli high-tech industry has great value, and when global growth recovers, we believe that it will become more attractive, and will generate opportunities in many areas, including in agriculture, artificial intelligence, quantum computing, fusion, cybersecurity, and cleantech.
"If I had to point to one opportunity, I’d point to the importance of AI in enterprise strategy and in investment. The rate of opportunities now being created by AI is amazing, which of course is good news for Israel.
"The whole world is preoccupied with this. I have just returned from hosting our annual conference on breakthrough technology, which discussed how it’s possible to continue developing the discourse on where we go from here. We brought together a group of world pioneers, thinkers, risk takers, academics, commentators, moderators and investors. All of them are inspired by the latent possibilities in science, in technology, and in the way all these elements are connected to money.
"In terms of where Bank of America invests, the cautious answer is: everywhere. The existence of a successful branch here in Israel and around Europe is a critical element in our international strategy. That way, we continue to take market share in our corporate and investment banking business and in global markets, while we continue to focus on responsible growth."
How should Israeli companies behave when they come to enter the US market?
"Founders and senior managers must examine the best way of establishing a strong foothold in the US market right from the early stages of setting up their companies. That can be achieved through strong support from US shareholders, strategic alliances, and support from large US banks."
"Global economy still in transition
Mensah deals in planning and executing Bank of America’s global strategy, and so his knowledge of what is happening in the world is immense, and it’s hard not to wonder what he thinks about the global economy, when it is still not clear whether it will emerge from the current economic crisis without a recession.
"The global economy is clearly still in a transition period as far as growth is concerned," Mensah says. "We see this in inflation, which remains high, and in the contractionary monetary policy of the central banks. The general picture is of weak growth, a hesitant return of inflation to the original target, and a forecast of monetary policy dependent on data and news."
As for the US, Mensah explains that the Bank of America’s forecast sees the economy undergoing a mild recession early next year, with the Federal Reserve itself expecting an "easy landing" by the US economy from the high inflation rate it reached at the end of last year. In Europe, he says, growth should remain above zero, but the forecasts for the future are very restrained.
Published by Globes, Israel business news - en.globes.co.il - on August 2, 2023.
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