A recent report by Bank of America has stated that the government of Israel will likely fail to meet its target deficit goal of 6.5% unless there is a conflict escalation in the north. The analysis in the report compares Israel’s economic outlook with and without an escalation of conflict, showing that a new front would significantly increase the country’s fiscal burden, affecting its ability to meet its deficit target. This could lead to a weaker Shekel and delayed interest rate cuts by the Bank of Israel.
Despite a quick recovery in demand in Israel, war-related expenses are contributing to a large fiscal deficit. Additionally, factors such as increased tax rates, supply-side constraints, and a weak currency are also leading to inflation. The report predicts that Israel’s central bank rate will be at 3.75% by the end of 2025, with expectations for rate cuts pushed to the following year.
If there is no escalation in the north, according to the report, Israel’s economy will gradually normalize, and the risk premium will decrease. Bank of America forecasts GDP growth of 2.2% in 2024 and 3.5% in 2025, with consumer price index inflation reaching 2.8% in 2025 and dropping to 2.3% in 2026.
In summary, if there is an escalation of conflict in the north, it could lead to a larger fiscal burden on Israel and impact its ability to meet its deficit target goals. If there is no escalation, however, Israel’s economy is expected to gradually normalize and continue growing at moderate rates over time.
The report highlights some key challenges facing Israeli policymakers as they navigate their economic landscape amid ongoing geopolitical tensions with neighboring countries. It emphasizes the need for careful planning and coordination between different government agencies and stakeholders to address these challenges effectively.
Overall, while some uncertainty remains around what may happen next year regarding conflict escalations or interest rate cuts by Bank of Israel, this mid-year review offers valuable insights into how Israeli policymakers can better understand their economic environment and make informed decisions based on current trends and data available today.
It is important for investors looking at investing opportunities in Israeli companies or sectors should keep these trends in mind when making investment decisions as they can affect financial performance adversely if not managed correctly.
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