Merrill Lynch Revises Israel Growth Downward

Merrill Lynch analysts have revised down their growth forecast for Israel, saying that the slowdown is more serious than Bank of Israel assessments, Globes reported on Wednesday.

Brexit and other international factors will combine to hurt the Israeli economy, Merill Lynch said, and cited weak first quarter growth figures. The growth forecast was adjusted to 2.4 percent from 2.7 percent and its 2017 forecast to 2.8 percent in 2017 from 3.1 percent.

“The slowdown in exports is likely to be structural, not cyclical or temporary, as the Bank of Israel thinks. The BoI attributed the 1Q export decline to one-off shocks in the high-tech sector, which is less sensitive to FX. However, we note that medium- to low-tech sectors of the economy have been bearing most of the brunt amid the persistent NIS appreciation trend since 2013,” the analysts said.

“Israel’s competitiveness has deteriorated significantly according to measures calculated by the Organization for Economic Cooperation and Development (OECD). The relative export price has surged by around 20 percent since mid-2014, while the relative unit labor cost has risen by around 10 percent since early 2013. 1Q GDP revealed the sixth consecutive quarter of falling exports year-on-year. We also notice tentative signs that Israel is starting to lose market shares in the Eurozone and US markets.”

Merrill Lynch looks for the shekel-dollar exchange rate to rise to NIS 4/$ and adds, “The BoI has stepped up on intervention as we expected…but we find strong resistance to more forceful FX policy to keep the currency sustainably weak to support the economy. Political constraints probably partly explain the BoI’s reluctance to put in a floor similar to the Czech Rep and commit to unlimited intervention.”

“So for now, the central bank will probably continue with its gas program and ad hoc FX purchases. We continue to see limited arguments for the use of negative rates, or quantitative easing, to loosen monetary conditions in Israel,” Merrill Lynch concluded in its report.