Investment Bank HSBC reduced its growth forecast for Israel Thursday from 5 percent to 4% for 2006 and from 4.1% to 3.6% for next year, saying the heavy cost of the war could cloud macroeconomic performance.
HSBC estimated that the war in Lebanon cost NIS 21 billion, or 3.7% of GDP, based on a scenario that geopolitical calm will be maintained, "A return to fighting would cause further reduction to these estimates," HSBC said in a research report entitled "Israel after the War."
"Geopolitical uncertainty should continue to remain high in the region, which should have a negative influence on economic development," it stated.
Separately, investment house Merrill Lynch pointed at political instability and a slowdown in the US economy as the main factors affecting short-term growth in Israel. Merrill gave a more positive view of the economy, noting the shekel's resilience through the month-long conflict.
Since the day after the war broke out, when the shekel plunged close to 4% in one day to NIS 4.55, the currency has moved back beyond its pre-war level to close at NIS 4.36 Thursday.
"Despite the recent war in Lebanon, we believe the Israeli economy remains in good shape," Merrill Lynch analyst Mehmet Simsek said in a research report. "We expect the impact of the war to be temporary... However, three worries are likely to persist in the near term."
Simsek said that the biggest concern among investors was whether Prime Minister Ehud Olmert's coalition government would become a casualty of the "inconclusive war in Lebanon."
The falling public support for Olmert's government over the handling of the war might undermine its ability to preserve fiscal discipline, the analyst said.
"Given Israel's strong pre-war fiscal performance, we expect the full-year budget deficit to amount to around 2% of GDP, well below the target of 3% set for 2006," Simsek said.
A failure by the government to maintain a "prudent fiscal stance" would likely result in further interest rate hikes, he said. Other factors considered, however, he expects the Bank of Israel to keep the benchmark rate at 5.5% for the foreseeable future.
Meanwhile, Simsek looked abroad for the third element influencing investor confidence in the short term.
"A significant slowdown in the US economy could have a significant impact on Israel, which is a small, open economy, with some 35% of exports destined for the US," Simsek said. "The chief risk we see is a possible shift in domestic investors' preferences away from the shekel on the back of global monetary tightening."