"The proposed judicial reform causes instability," US investment bank Morgan Stanley has written a particularly comprehensive report that analyzes Israel's economy and strategy and puts a spotlight on the economic impact and uncertainty weighing on an otherwise strong economy. If the political tensions around the judicial reform continue, Morgan Stanley warns that growth in 2023 would be slashed to just 1%.
Morgan Stanley writes, "Domestic instability related to the proposed changes in the judicial system affects the economy both in the short and medium term: The heightened uncertainty related to the judicial reform can be characterized as a risk premium shock. In our base case, assuming uncertainty resolved in the coming months, we see 2.5% GDP growth (the same as the Bank of Israel's forecast), accelerating into 2024, and inflation returning within the target band by the second quarter of 2024. We expect the Bank of Israel to end its tightening cycle with a 0.25% hike to 5% in July, though the risks to our inflation and rates forecast are skewed to the upside.
"In the adverse scenario, with the tensions over judicial reform persisting for longer or even escalating, a higher risk premium and shekel depreciation would translate into higher inflation, averaging 5.1% in 2023, and forcing further tightening by the Bank of Israel to 6.25%. More broadly, we see lower economic confidence along with tighter monetary policy translating into lower investment and consumption and pushing economic growth to only 1% this year."
Published by Globes, Israel business news - en.globes.co.il - on June 28, 2023.
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