HSBC: Israel's fundamentals have never looked better

The bank predicts 4.9% growth in 2007, 2.1% inflation, and a 3.75% interest rate.

HBSC today published a new review of the Israeli economy, in which the bank raised its growth forecast to 4.9% in 2007, because Israel’s “economic fundamentals have never looked better.”

HSBC says that rapid consumption and investment growth will offset slower industrial export growth, and it expects the shekel to weaken slightly during the second half to NIS 4.25/$ by the end of the year as slower global growth restrains exports and investment flows. The bank also predicts that the interest rate will be 3.75% for most of the year, which will encourage capital outflows.

“The Bank of Israel sees a weaker shekel as a prerequisite for an increase in inflation into the 1-3% target band. Inflation is set to rise to 2.1% in 2007 with increasing signs of demand pushing inflation, higher wages and a housing recovery. Rapid growth and rising productivity coupled with low policy rates will be positive drivers for equity markets. Somewhat higher inflation and a weaker shekel (especially in the second half of the year), could be negative for fixed income markets depending on the path of US rates. The major risk to Israeli assets remains geopolitical. Low-level violence with the Palestinians will continue and a ceasefire with Hizbullah is likely to hold. The Iranian nuclear threat will most likely become a focus of attention in 2008-2009.’

HSBC notes that Israel’s economy proved “far more resilient” to the 34-day second Lebanon war in mid-2006 than previously thought, with GDP growth rebounding to 5% for the year. “The tourism sector, which fell sharply, rebounded by end-year. Industrial exports expanded by 9.0% quarter-on-quarter in fourth quarter, lead by high-tech exports. In addition, industrial production rose by 10% quarter-on-quarter, while strong growth in imports of raw materials and investment goods points to buoyant GDP growth ahead.”

HSBC’s growth prediction of 4.9% assumes “a soft landing scenario in the US. The cooling of the US economy is expected to be mostly consumer-led, while the bulk of Israeli industrial exports are geared to US technology investments. In addition, assuming global growth decouples somewhat from the US economy, Israel’s non-US exports (63% of all exports) will most likely continue to expand rapidly. Most sectors of the Israeli economy are expected to witness fairly rapid growth.”

In the political arena, HSBC says, “Despite the declining popularity of the government following the war, the coalition seems more stable than before... The protest movement following the war has dissipated, or at least seems to be directed more at decision-making within the Israeli army and at the Minister of Defense Amir Peretz than at the government level.”

HSBC predicts that “early elections are unlikely in the coming year.” In addition, “The present coalition approved the 2007 budget proposal in the Knesset without major alterations. The deficit target of 2.9% is a credible one, and appears somewhat on the cautious side. On the revenue side of the budget the GDP growth assumption is a conservative 3.8% (versus an HSBC growth forecast of 4.9%). We do not expect the fiscal deficit to be lower than 2% of GDP this year due to several fiscal threats, most notable among them being pressure for additional defense spending and demands for public sector wage hikes.”

Published by Globes [online], Israel business news - www.globes.co.il - on February 27, 2007

© Copyright of Globes Publisher Itonut (1983) Ltd. 2007

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