The fourth quarter seems to have followed in the footsteps of the rapid domestic-demand-driven economic growth observed in the third quarter. Consumer confidence in November reached its highest level since the survey began on a broad-based improvement. In the same month, the
Composite State of the Economy Index edged higher thanks to a solid domestic economy, as the external sector dragged on growth somewhat. The index thus trended markedly above the average reading of the third quarter in October–November. Moreover, November PMI data highlighted
improved business conditions in the manufacturing sector thanks to resilient domestic-demand dynamics, which offset a drop in foreign demand. Although exports contracted in the same month, the trade deficit narrowed owing to a moderation of import growth. In the political arena, Prime Minister Benjamin Netanyahu announced snap elections on 24 December, moving the scheduled general elections forward by six months as a police investigation accusing Netanyahu of corruption
reached its climax.
The economy is expected to be buttressed by domestic forces: Private consumption should benefit from a lower tax burden and still-favorable financial conditions, while fixed investment should reap the fruits of new gas- and oil-related projects. Regional tensions remain a key downside
risk, however, clouding the outlook. FocusEconomics Consensus Forecast panelists forecast economic growth to moderate to 3.2% in 2019, which is unchanged from last month’s forecast. In 2020, our panel sees the economy expanding 3.3%.
Inflation remained at 1.2% in November for the fourth month running and at the lower end of the Central Bank’s 1.0%–3.0% target range. Robust domestic demand should underpin inflation going forward. FocusEconomics panelists expect inflation to average 1.4% in 2019 and
1.6% in 2020.
At its monetary policy meeting on 7 January, the Bank of Israel kept its interest rate at 0.25% inflation. This meeting was the first under the governorship of Amir Yaron, whose term commenced on 24 December and the Bank is expected to raise rates only gradually to entrench inflation
within the target range. FocusEconomics panelists expect the interest rate to end 2019 at 0.69% and 2020 at 1.32%.
On 4 January, the Israeli shekel (ILS) traded at 3.72 per USD, strengthening 0.2% from the same day in December. A healthy current account surplus and robust economic growth should further strengthen the currency going forward. FocusEconomics panelists expect the shekel to end 2019 at ILS 3.70 per USD and 2020 at ILS 3.69 per USD POLITICS | Israelis gear up for early election as pressure on Netanyahu mounts
On 24 December, Prime Minister Benjamin Netanyahu called a snap election, scheduled to be held on 9 April, amid accumulating political pressure and calls for his resignation over corruption charges. Netanyahu has been under investigation for bribery, fraud and breach of trust since late 2016 and, in late
December, the Israeli police recommended his indictment for the third time this year. The final decision now rests in the hands of attorney-general, Avichai Mandelblit, who is expected to present an initial charge before the election. Israeli law, however, is unclear as to whether an indicted prime minister can remain in office. Compounding matters for Netanyahu, his government now
controls only 61 of the 120 seats in the Knesset after losing support of some junior coalition parties in recent months. Former army Chief of the General Staff Benny Gantz, who only established his
own party on 27 December, has emerged as the biggest threat to Netanyahu. However, popularity polls show that he is still trailing the incumbent prime minister by around seven percentage points. On 10 January, Gantz is scheduled to give his first speech where he is likely to outline his agenda
and policy aims. Thus far, he has remained mostly silent since registering his Hosen L’Israel (Israel Resilience) party, other than saying that he is hawkish on security issues. Yair Lapid, the leader of the centrist Yesh Atid opposition party, is considered the dark horse contender.
Meanwhile, the center-left opposition alliance, the Zionist Union, dissolved in early January. The Labor party and the Hatnuah party are therefore currently set to contest the election separately: Labor are positioned to win seven to eight seats according to opinion polls, while Hatnuah could risk not even meeting the election threshold of 3.25% of the votes cast. Nonetheless,
the leader of the Labor party, Avi Gabbay, has not ruled out joining a new Netanyahu-led government post-election. Against this backdrop, the most likely outcome seems to be another right-wing coalition government and a broad continuation of current economic policies.
The economy is expected to grow firmly this year and the year after, aided by resilient domestic demand and robust foreign demand. However, rising inflationary pressure will likely put a lid on private consumption growth by denting purchasing power. Lingering global trade tensions remain a downside risk to Israel’s economy, while regional instability clouds the outlook. TheBoI expects GDP to grow 3.4% in 2019 and 3.5% in 2020. FocusEconomics Consensus Forecast panelists expect the economy to grow 3.2% in 2019, which is unchanged from last month’s forecast. For 2020, our panel expects 3.3% growth.
REAL SECTOR | Economic activity index edges up in November The Bank of Israel’s Composite State of the Economy Index increased 0.32% over the prior month in November, up from an upwardly revised 0.30% in October (previously reported: +0.26% month-on-month). The print was driven by a pick-up in imports of consumer goods and manufacturing inputs. Lagging
retail trade revenue and services revenue data for October also supported the expansion in the headline figure. On the other hand, the overall acceleration was held back by declines in goods exports and the job vacancy rate in November.
On a year-on-year basis, growth in the index was stable at October’s revised 3.2% in November
REAL SECTOR | Business conditions continue to improve in November amid resilient local demand
In November, the Purchasing Managers’ Index (PMI), produced by Bank Hapoalim and the Israeli Purchasing & Logistics Managers Association (IPLMA) rose to 53.7 in November from 52.7 in October. As a result, the index moves further north of the crucial 50-point mark that separates expansion from contraction in the manufacturing sector. The headline reflected stronger domestic demand offsetting a drop in foreign demand; a significant acceleration in output growth; stronger job creation; and a reduction in the stocks of finished goods. FocusEconomics Consensus Forecast participants expect fixed investment to increase 4.8% in 2019, unchanged from last month’s forecast. For 2020, the panelists expect fixed investment to expand 4.3%.
OUTLOOK | Consumer sentiment reaches highest level in survey history in November
Although remaining entrenched in negative territory, Israeli consumer confidence improved markedly in November. Sentiment among consumers increased from minus 9.2 in October to minus 5.7 in November, this marked the best result in the survey’s history. The rise came on the back of a broad-
based improvement in underlying components: Consumers were more optimistic about their ability to save money, the state of the labor market, and both their own and the country’s general economic situations. Meanwhile, business sentiment was stable at October’s 22.6 in November.
FocusEconomics Consensus Forecast panelists expect private consumption to grow 3.5% in 2019, which is down 0.3 percentage points from last month’s forecast. Our panel expects private consumption to grow 3.4% in 2020.
MONETARY SECTOR | Inflation remains within the Central Bank’s target range in November
Consumer prices fell 0.3% over the previous month in November, contrasting October’s 0.3% increase. The price decrease was driven by lower prices for all but two subcategories. Fresh vegetables and clothing prices increased but the affects were negated by cheaper prices elsewhere.
Inflation was stable at 1.2% in November, remaining within the Bank of Israel’s 1.0%–3.0% target range for the sixth consecutive month. Annual average inflation edged up from 0.7% in October to 0.8% in November. Lastly, core inflation—which excludes volatile energy prices—was also stable
at October’s 1.0% in November. The BoI expects inflation to average 1.3% in 2019 and 1.8% in 2020. FocusEconomics Consensus Forecast panelists expect inflation to average 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. 2020, our panelists expect inflation to average 1.6%.
MONETARY SECTOR | Bank of Israel stands pat in January At the first Monetary Committee meeting under the governorship of Amir Yaron on 7 January, the Bank of Israel held fire and kept the policy rate at 0.25% after it had raised the interest rate by 15 basis points in November. The
decision was in line with market expectations and was taken on the grounds of stabilizing inflation near the lower bound of the Bank’s target range amid a moderating, but nonetheless more sustainable, pace of economic growth and heightened global economic risk stemming from factors such as trade
The Bank noted that inflation has been stabilizing near the lower bound of the 1.0%–3.0% target range, and expects the rate to remain steady in the months ahead before picking up pace. Committee members anticipate the inflation rate returning towards the midpoint of the inflation target due to “continued wage increases” as well as “the economy being around full employment”. The
unemployment rate stood at 4.1% at the end of November, thus remaining near a multi-year low. Subsequently, continued robust domestic demand—driven by private consumption, fueled by the tight labor market—should buttress economic activity “at a pace […] around the long-term path”, according to the Committee. Moreover, data on job vacancies and wages “support the assessment that the economy is around full employment, thus creating a supply constraint”. While
low unemployment bodes well for continued private consumption growth, it could prove to be a bottleneck for further growth in output as companies find it increasingly difficult to hire qualified staff. Meanwhile, the external environment appears to be increasingly fragile as global growth momentum moderates amid heightening geopolitical risks, chiefly stemming from the trade spat between the world’s two largest economies. According to the Committee, such downside risks “are trickling down to the business activity of leading corporations”. Although hinting at possible future rate hikes, the Bank struck a slightly more dovish tone in its press release. Summarizing this position, the Committee assessed “that the rising path of the interest rate in the future will be gradual
and cautious, in a manner that supports a process at the end of which inflation will stabilize around the midpoint of the target range, and that supports economic activity.” The next Monetary Committee meeting is scheduled for 25 February. FocusEconomics Consensus Forecast panelists currently seeing the interest rate ending 2019 at 0.69%. For 2020, our panelists see the interest rate
ending the year at 1.32%.
EXTERNAL SECTOR | Trade deficit narrows despite steep drop in exports In November, exports contracted 6.7% year-on-year in USD terms, swinging from an upwardly revised 9.9% expansion in October (previously reported: +8.3% year-on-year). The drop in exports came on a broad-based deterioration as attested to by the trend data for September–November. The trend data
showed a decrease in exports of high technology; medium-low technology; and low technology goods. High technology exports dropped due to less foreign demand for electronic components and boards while medium-low technology exports suffered from reduced overseas demand for basic metals. On the other hand, medium-high technology goods exports increased, in part thanks to the motor vehicles industry. Growth in imports, meanwhile, decelerated from a 21.3% increase in October to a 13.6% expansion in November in USD terms. Trend data showed that import growth in September–November was supported by an increase in demand for raw materials, investment goods, and consumer goods As a result, the trade deficit narrowed from USD 2.9 billion in October in to
USD 1.9 billion in November. This is, however, up from the USD 759 million shortfall in November 2017. The 12-month rolling trade deficit widened from USD 23.9 billion in October to USD 25.0 billion in November. FocusEconomics Consensus Forecast panelists expect exports to grow by
5.6% in 2019 and imports by 5.6%. Our panel expects a merchandise trade deficit of USD 15.2 billion in 2019. For 2020, our panel expects exports to expand by 7.1%, imports by 5.6% and the merchandise trade deficit to narrow to USD 15.1 billion.
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