Merrill Lynch finds Israel's economy facing one of its most challenging times since 2001-2002.
The investment house does not expect the security situation to substantially impact Israel's economy, saying that similar situations, as well as elections, have not previously had major influences on the local market. However, the global financial crisis and slowdown are expected to weigh on the economy.
Merrill says that the US and Europe account for 73% of Israel's exports, so the global crisis has a significant impact. However, Merrill finds that the Bank of Israel has been one of the world's "most proactive", which should limit some of the downside.
According to Merrill, the stress on Israel's economy will bring the Bank of Israel's interest rate to 1% by the end of the first quarter of 2009.
Merrill analyst Turker Hamzaoglu cut the bank's growth forecast for Israel's economy to 0%, from 1%. It expects a slight upturn in the second half of 2009, after a contraction in the first half of the year.
Hamzaoglu also expects only a modest recovery of 1.5% GDP growth in 2010.
With Israel's trade partners expected to sink deeper into recession, and its exports falling more than its imports, Merrill forecasts Israel’s current account surplus to erode completely in 2008 and to slip into a deficit of 1% of GDP in 2009.
While "Israel has consistently delivered smaller than targeted budget deficits over the past five years", writes the analyst, "This is likely to change. As growth has slowed and spending needs have increased, the fiscal deficit is likely to rise to 4.2% of GDP in 2009."
The bank also expects 2009 inflation to reach 1.2%, with the Consumer Price Index (CPI) reaching negative territory by the third quarter of 2009.
Merrill sees the global recession hitting Israel in reduced foreign trade, tighter credit for Israeli companies, and the effect of investment flows on shekel rates.
Merrill notes that external demand is the main channel through which the global recession will impact Israel. Hamzaoglu says, "The fact that 75% of Israel’s manufacturing exports are the products of high-tech sectors still represents a silver lining. However, the global recession and credit crunch not only calls for a contraction in the impaired balance sheets of Anglo-Saxon households but also the same for corporates. Considering that Israel was growing above potential, building up inflationary pressures in the first three quarters of 2008, a sharp downturn in external demand will drag down both GDP growth and inflation."
While strong financial markets in Israel helped the economy to get past the onset of the global slowdown, as credit dried up in September and October, "Israeli companies were cut out of the capital markets and redemptions accelerated with plummeting corporate bond prices." Merrill finds that the net effect of less credit being available in 2009 should drag down both growth and inflation.
Referring to unemployment, Merrill says, "Having come down to an estimated 6.2% in 2008 from 7% in 2007 its lowest level in well over a decade unemployment is expected to jump back to 6.8% in 2009 and 7.1% in 2010. Company surveys already point to deep cuts in employee numbers in the fourth quarter of 2008, which is likely to put further pressure on wages. Official data suggests wages were down 2% and 5% in nominal and real terms, respectively, in the third quarter of 2008 compared with the second quarter of 2008. This should put a cap on private consumption in 2009 despite the aggressive monetary stimulus given by the Bank of Israel."
Published by Globes [online], Israel business news - www.globes-online.com - on January 11, 2009
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