Credit Suisse lowers Israel's growth forecast

Slow recovery of major export markets dampens Israel's medium term outlook.

Factoryworkers311 (photo credit: .)
(photo credit: .)
Europe’s debt crisis and expectations of a slower recovery in Israel’s major export markets make it likely that economic growth will increase at a slower pace in 2011, Credit Suisse said in a report Thursday.
“Having built up impressive momentum in the second half of 2009, Israel’s economy seemed destined to power ahead in 2010 and 2011. The economic recovery remains on track, but headwinds are intensifying,” Credit Suisse economist Ivailo Vesselinov said in the report. “Recent global economic developments such as the fiscal crisis in the euro area have increased uncertainty about the medium-term outlook for Israel. The recent events appear to have increased the risk of a slower-thanexpected economic recovery in Israel’s key export markets.”
Credit Suisse cut Israel’s 2011 growth forecast to 3.8 percent from 5.0%. Its forecast for 2010 of 3.4% remained unchanged.
The Bank of Israel in April raised Israel’s 2010 growth forecast to 3.7% from 3.5% and said the economy would expand 4% in 2011. The Finance Ministry said earlier this month the economy would grow 3.6% this year, 3.8% in 2011 and 4% in 2012.
Credit Suisse said growth in the euro zone would come primarily from increased competitiveness due to the euro’s depreciation, with domestic demand remaining subdued. It said the outlook for the US consumer remained uncertain because of high unemployment.
“For Israel, we continue to project a recovery in investment and private consumption in 2011, but these are now likely to be more gradual than we had previously envisaged,” Vesselinov said.
The Credit Suisse report said a slower recovery in key export markets would increase the importance of helpful monetary and fiscal policies if the recent pace of economic expansion is to be preserved.
“The central scenario implies that demand will not recover sufficiently to generate sizable inflation pressures over our forecast horizon,” Vesselinov said. “We project that favorable base effects will drive inflation back within the target range [1% to 3%] in the short term, with the headline figure reaching 2.3% year-on-year by end- 2010, before a modest increase to 2.6% by the end of next year.”
Credit Suisse said Israel’s interest rate would rise gradually from the current 1.5% to 2.25% by the end of 2010 and to 3.25% by the end of 2011, from its previous forecasts of 2.50% and 3.75%, respectively.
“We expect that the combination of lower GDP growth and more gradual monetary tightening will also result in less pronounced appreciation pressures on the shekel,” Vesselinov said. “Our revised shekel-dollar exchange forecasts stand at NIS 3.70 by end- 2010 and NIS 3.60 by end-2011, respectively, from NIS 3.60 and NIS 3.40 previously.”
Bank of Israel Governor Stanley Fischer will announce the interest-rate decision for July on Monday. The market consensus is that the central bank will leave the base lending rate unchanged at 1.5% due to the debt crisis in Europe and signs of a slowdown in local exports.
Meitav Investment House chief economist Ron Eichel predicts that Fischer will raise the interest rate by 25 basis points to 1.75%, leave it unchanged for August and then gradually raise it to 2.25% by year-end.
Harel Investment House chief economist Michael Sarel said the Bank of Israel would prefer to leave the interest rate unchanged because of growth uncertainties in Europe. However, inflationary pressures and the continued rise in housing prices support an increase in the base lending rate, he said in a report.
“According to our predictions, there is more than a 50% chance that the July interest rate will be raised by 25 basis points,” Sarel said.