UBS has joined Morgan Stanley and Barclays Capital in projecting positive growth for the Israeli economy this year. In an updated review, UBS economist Reinhard Cluse has raised his growth estimate from -0.8% to 0.3% for 2009, and from 2.7% to 3% for 2010.
"Thanks to sound macroeconomic and structural fundamentals, the Israeli economy has shown good resilience throughout the global crisis." He describes the recession in Israel as having been short and mild. The economy grew at a rate of 1% in the second quarter, and thus technically emerged from recession.
Cluse's growth estimate for 2010 is the most aggressive yet published, but he notes that "this is above consensus, but still below Israel’s medium-term growth potential, which we estimate at around 4%."
Cluse believes that the Bank of Israel will continue to reduce its involvement in the market, and will switch to a policy of monetary tightening."We now expect a string of small hikes that would take policy rates to 1.75% by end-2009 and 3.75% by end-2010, from currently 0.75%. Although we assume faster rate hikes than consensus, we do not regard our scenario as aggressive tightening, but merely a gradual move towards more neutral interest rates, which we estimate at c4.5%."
Like most foreign institutions with a bullish position on the shekel, UBS too estimates that economic growth and the current account surplus will continue to support an appreciation of the shekel against the US dollar. The Bank of Israel sees a $6.9 billion current account surplus this year. Cluse sees shekel-dollar exchange rates of 3.80/$ at the end of 2009, and 3.50/$ at the end of 2010. "We also expect the shekel to benefit from the weaker dollar, which we now expect to depreciate to 1.50 against the euro by end-2010," he writes.
On fiscal policy, Cluse writes, "The high public-sector debt stock remains a major blemish in Israel’s macro picture. Yet, conservative fiscal policy in recent years has helped to cut the debt stock from 100% of GDP in 2003 to 78% of GDP in 2008. This has given the government room to boost deficit spending substantially this year without spreading panic in the bond market. Obviously, the markets remain convinced that public finances will not spiral out of control and that, after a rise of two to three years, the debt ratio will decline again over the medium term."
Published by Globes [online], Israel business news - www.globes.co.il - on September 21, 2009
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