Credit Suisse’s annual forecast for the Israeli economy for the coming year is included in the Bank’s global forecast and indicates that the growth rate of gross domestic product in real terms is expected to remain above or around the average growth rate in the pre-Corona epidemic. 2021
The expectation is for the expansion of real GDP of 4.1% and 5.5%, compared to a growth rate of 7.0% -7.1% which was recorded in 2021. The good performance of the economy in 2021 was due, among other things, to the Israeli government’s success in corona virus vaccinations. And as a result of impressive data on exports of goods and services from Israel. Economy growth in 2022 is expected to be driven by a significant increase in private consumption and investment in fixed assets. This is on the condition that the negative risk to the forecast in 2022 will not increase due to the consequences of the continued disruptions in the world supply chain or the further deterioration of the corona plague.
The Bank of Israel is not expected to raise interest rates
Referring to the Bank of Israel’s monetary policy, Credit Suisse’s economists state that the approach to keeping interest rates low in order to stimulate the economy is expected to moderate, but interest rate hikes are not forthcoming. According to them, the Bank of Israel is expected to remain neutral in the coming months, with the inflation rate likely to rise and reach the upper limit of the target range set by the central bank of 1.0% -3.0%. Still, the structural pressure on the shekel suggests that the bank is expected to maintain interest rates at least 0.1% throughout the first half of the year, and may consider raising interest rates only if inflation surprises. The Bank of Israel forecasts that inflation will moderate from 2.5% in the last quarter of 2021 to 1.6% in the last quarter of 2022.
Bank of Israel, not expected to raise interest rates, Photo: Yonatan Sindel / Flash90
In the area of the exchange rate, it seems that the shekel will remain subject to ongoing structural appreciation pressures also in 2022, as a result of a significant surplus in the current account as well as the constant sale of dollars by local institutional investors while hedging their foreign investments. Although Credit Suisse economists predict that the current account surplus will decline in the coming quarters (from an annual high of 5.7% in the second quarter of 2021 on a rolling basis), the balance of payments situation is expected to continue to support the shekel in the near future. As these trends continue, the Bank of Israel is expected to continue to allow for further gradual and moderate declines in the dollar and euro exchange rate in 2022, as long as inflation remains relatively high. The exchange rate of the dollar against the shekel may fall to NIS 3 to NIS 3.05 in the first half of next year.
Credit Suisse economists estimate that fiscal policy and the internal political situation are likely to remain stable. The unity government, led by Naftali Bennett, formed in June 2021 after a long period of political instability passed the budget for 2021/22 in the Knesset earlier this month. At the same time, the fiscal situation has improved since the second quarter of 2021 thanks to an increase in economic activity and a significant increase in tax revenues related to technology and innovation.