Meitav: 5 reasons for optimism on Israeli economy

In his weekly poll, Alex Zabiginski, chief economist at investment house Mitav, paints a positive picture of the Israeli economy, which contradicts recent negative assessments. He writes that the “wisdom of crowds” in markets is justified. Although there are significant downside scenarios, in the main scenario the risk to growth and deficits in 2025 is reduced compared to the situation before the war in the north worsened. “We believe that the growth outlook for the Bank of Israel is very pessimistic, and certainly the expectations of the rating agencies.”

Zabyczynski points to the fact that last week the Bank of Israel lowered its growth forecasts, predicting that inflation will remain high and that the fiscal deficit will be wider than the Ministry of Finance expected. Bank of Israel Governor, Professor Amir Yaron, warned that raising interest rates is a real possibility even though the rest of the world is cutting interest rates.

At the end of last month, Moody’s downgraded Israel by two notches and sees the economy struggling to recover from the war, while Standard & Poor’s merely downgraded the rating by one notch and expects 0% growth in 2024, reflecting a real contraction and fiscal deficit. 9%, much higher than the Finance Ministry’s forecast of 6.6% and the Bank of Israel’s forecast of 7.2%.

Countering this pessimism, Zabieczynski insists that markets are a much better indicator of the future. He cites five main reasons for this optimism.

First, over the past week, the shekel was the world’s strongest currency against the US dollar, rising by 0.8% while the dollar fell on average by 0.5% against the basket of major currencies.

Second, the Tel Aviv Stock Exchange index rose 3% last month, more than the average rise of 3% for European stocks and slightly less than the S&P 500’s rise of 3.4%.

Third, the gap between ten-year Israeli government bonds and their American counterparts narrowed by 0.5% over the past three weeks.

Fourth, 108,000 new jobs were created in the Israeli economy between April and June 2024.

Fifth, the average salary in Israel in July 2024 was 13,591 shekels, an increase of 6% from July 2023.

Zabieczynski says investors understand that despite concerns about the war in Lebanon, “the consequences are clearly less threatening to the routine operation of the economy.” If the market is right, Zabiezinski’s assessment is that growth in Israel will be higher than expectations.

Zabeshinsky’s voice is exceptional. Yaron said last week: “It is important to pay attention and take the rating agencies’ ratings seriously, because they reflect the challenges and risks facing the Israeli economy as seen by the world.”

Other Israeli analysts are not optimistic. Ofer Klein, head of economics and research at Harel Insurance and Finance, said investors do not have to be “optimistic.” “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 confirms: “We see a positive sentiment in global capital markets in general.” He adds that the rating downgrades did not cause sharp fluctuations in the markets, and this is because “a large portion of foreign investors have not returned to invest in Israel since the beginning of 2023, and therefore have less impact on trade.”

IBI Chief Economist Ravi Gozlan also stresses the seriousness of the situation. “Spreads in the dollar government bond market are approaching record levels in 10- and 30-year bonds,” he wrote in his survey. “The increase in the risk premium is also reflected in the foreign exchange market, but is more limited due to potential intervention by the Bank of Israel.”

Published by Globes, Israel Business News – en.globes.co.il – on October 14, 2024.

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