Morgan Stanley has researched how the downside risks to growth in the US economy could threaten the rest of the world, and lists Israel as the region's "most vulnerable country" to a US slowdown.
Analyst Serhan Cevik explains that "the correction in the housing market has brought a gradual slowdown in America’s real GDP growth, from 3.1% in 2005 to 2.9% in 2006 and, according to our estimates, to 1.9% this year. However, the liquidity squeeze and financial de-leveraging could prolong the housing slump and become a drag on overall economic growth."
"Domestic and intra-regional factors should minimize the knock-on effects on the global economy, but the deepening of economic troubles in America could still have unexpected spillover effects across the world", notes the investment bank.
Cevik points out that "Israel is the most vulnerable country to a major slowdown in the US. With almost 40% of exports going to America, the Israeli economy is highly exposed to what happens in the US. Indeed, its growth correlation with the US economy increased from -0.15 in the 1990s to 0.76 between 2001 and last year."
"For the time being, our projections point to real GDP growth at about 6% this year and 5.5% in 2008. However, a significant weakening in the US would lower growth in Israel through the trade channel, limited access to capital markets for start-up companies and the negative wealth effect. Given our US economics team’s alternative scenario, we would expect real GDP growth in Israel to be 5.6% in 2007 and about 4.5% next year. The limited fallout on the rest of the world and the strength of domestic demand should prevent a more dramatic deterioration in growth outlook."
"In such a scenario, the Bank of Israel would limit its tightening campaign to 4.50-4.75%, keeping inflation within the target range. Since the shekel is fundamentally undervalued, we see no reason for sustained depreciation."
Published by Globes [online], Israel business news - www.globes.co.il - on August 21, 2007
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