In his weekly survey Meitav Investment House chief economist Alex Zabezhinsky paints a positive picture of the Israeli economy, which goes against the grain of recent negative assessments. He writes, "The 'wisdom of the crowd' in the markets is justified. Although there are significant negative scenarios, in the main scenario the risk to growth and the deficit in 2025 has decreased compared with the situation before the war in the north worsened. We think that the growth forecast of the Bank of Israel is too pessimistic, and for sure the forecasts of the rating agencies."
Zabezhinsky is referring to the fact that last week the Bank of Israel cut its growth forecast, predicted that inflation will stay high and that the fiscal deficit will be wider than the Ministry of Finance expectations. Bank of Israel Governor Prof. Amir Yaron warned that an interest rate hike is a real possibility even though the rest of the world is cutting rates.
At the end of last month Moody's cut Israel's rating by two notches and sees the economy struggling to recover from the war, while S&P made do with a one notch downgrade and expects 0% growth in 2024, reflect a real contraction, and a fiscal deficit of 9%, far above the Ministry of Finance forecast of 6.6% and the Bank of Israel forecast of 7.2%.
In bucking this pessimism, Zabezhinsky insists that the markets are a much better indication of the future. He cites five major reasons for this optimism.
Firstly over the past week the shekel has been the strongest currency in the world against the US dollar, strengthening by 0.8% while the dollar weakened on average by 0.5% against the basket of major currencies.
Secondly, the Tel Aviv Stock Exchange TA Index rose by 3% last month, more than the average rise of 3% by European stocks and slightly below the S&P 500's rise of 3.4%.
Thirdly, the gap between 10-year Israeli government bonds and their US counterparts narrowed by 0.5% over the past three weeks.
Fourthly 108,000 new jobs were created in the Israeli economy between April and June 2024.
Fifthly the average salary in Israel in July 2024 was NIS 13, 591, up 6% from July 2023.
Zabezhinsky says that investors understand that despite concerns about the war in Lebanon, "It is clear that the consequences are less threatening on the routine operation of the economy." If the market is right, then Zabezhinsky's assessment is that growth in Israel will be higher than expectations.
Zabeshinsky's voice is exceptional. Last week Yaron said, "It is important to pay attention and take the assessments of the rating agencies seriously, as they reflect the challenges and risks faced by the Israel economy as the world sees it."
Other Israeli analysts also do not radiate optimism. Harel Insurance and Finance head of economic and research department Ofer Klein said that it is not necessarily 'optimism' being shown by investors. "Israel has a large current account surplus as dollars enter the economy every day and are converted into shekels. The fact that the shekel remains relatively stable even at a time like this does not stem from a sense of optimism." Klein also stresses, "We see a positive sentiment in the world's capital markets in general." He further adds that the rating cuts did not cause sharp fluctuations in the markets, due to the fact that "A large part of the foreign investors have not returned to invest in Israel since the beginning of 2023, therefore they have less influence on trade."
IBI chief economist Rafi Gozlan also emphasizes the seriousness of the situation. He wrote in his survey, "The spreads in the dollar government bond market are close to record levels in 10 and 30-year bonds. An increase in the risk premium is also reflected in the foreign exchange market, but it is more limited due to the potential intervention of the Bank of Israel."
Published by Globes, Israel business news - en.globes.co.il - on October 14, 2024.
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