Indicators point to strong investor confidence in Israel

Fourteen months after the war, there are at least three signs that the Israeli economy still enjoys investor confidence.

First of all, this year’s return on the Tel Aviv 125 index exceeded the S&P 500 index, with a rise of 28.5%, compared to 24.3% for the US index. In fact, it is difficult to find an important index that outperforms the Tel Aviv 125 index. However, it should be taken into account that the performance of the local stock market last year was much lower than expected, against the backdrop of the judicial reform program launched by the government and the reaction to the crisis. . Therefore, the war broke out on October 7.

Israeli stock indices showed strong gains mainly in the second half of this year. The decline in the Israeli risk premium and the ceasefire on the northern front gave the signal for an impressive rise.

The figures recently issued by the Central Bureau of Statistics are another indication of high confidence in the local economy. In the third quarter, inward investments showed a recovery, totaling $11.5 billion, the highest quarterly figure since 2021.

Moreover, the current account surplus in Israel’s balance of payments increased. Between the fourth quarter of 2023 and the third quarter of 2024, a cumulative surplus of $24.8 billion was recorded. This compares to a surplus of $19.5 billion in the four quarters preceding the war. These numbers mean that Israel exports more than it imports, leading to an accumulation of financial assets facing the rest of the world and upward pressure on the shekel.

In fact, the shekel had appreciated by more than 5% against the US dollar since the period immediately preceding the war. On October 6, 2023, the representative exchange rate of the shekel to the dollar was 3.863 shekels/dollar. The representative rate today is 3.65 shekels/dollar. Strengthening the shekel reduces inflation, which provides relief for the economy and the individual. Economists argue that the foreign exchange market is still pricing in a risk premium, meaning that if the war ends, the shekel has the potential to strengthen further.

A surprise from The Economist

The Economist ranked the strongest economies for 2024, and surprisingly, Israel ranked highly. The 37 economies included in the study were ranked according to several criteria to see which ones performed best this year, such as growth rate, stock market performance, inflation, unemployment, and fiscal deficit.

Spain was the best performing country, as two years ago it shared fourth place with Israel. Then come Greece, Italy, Ireland, and Denmark, and Israel comes after them in sixth place (with Colombia).

Israel’s strong macro numbers have pushed Israel up its relatively high rankings, as low unemployment and stock market performance have strengthened the country’s position in recent months. Moreover, the way The Economist measured growth in Israel (from the fourth quarter of 2023 to the third quarter of 2024) creates a particularly positive picture: economic growth of 6.7%. The Economist explains this exceptionally high number by the high growth in the first quarter of this year, after a contraction near the end of 2023, when the war began.

However, there are some flaws in The Economist’s style. The numbers for Israel paint only a partial picture. Economic growth has been impressive so far, but the annual figure for 2024 will be much lower, with growth almost zero, while per capita growth will be negative.

There are also question marks over Israel’s future growth. Various international bodies, including international credit rating agencies, estimate that Israel will find it difficult to quickly return to the growth rates that characterized it before the war. The fiscal deficit, which is expected to reach 7.5% of GDP at the end of the year, does not receive much attention. It should be noted that Israel’s credit rating has been lowered more than once by all rating agencies in the past year.

The survey conducted by The Economist magazine emphasizes the more positive aspects of the Israeli economy despite the war. Private consumption reflects optimism, and the country’s financial institutions are strong. The Bank of Israel is able to support the markets in the event of a market failure, as happened with the exchange rate at the beginning of the war, when the Central Bank launched a program to sell $30 billion, although in the end it only had $8 billion to sell.

Another encouraging sign for the local economy is the strength of the shekel and expectations that the inflation rate will moderate over the next 12 months and will come within the price stability range set by the Bank of Israel of 1-3%.

Published by Globes, Israel Business News – en.globes.co.il – on December 23, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.