A more expansionary fiscal policy could damage credibility if economy slows

ISRAEL - In Brief 15 Aug 2016 by Jonathan Katz
Weekly Highlights: Fiscal policy has become increasingly expansionary since end-2015. Fiscal expenditure increased by 6% per year in 2015 and 2016. Expenditure in the 2017-2018 will expand by 5% per year (nominal). In essence the fiscal expenditure growth cap has been abandoned. The fiscal deficit target has been revised to 2.9% for both years, from 2.5% in 2017 and 2.25% and 2018 by previous law. Robust revenues from specific sectors have maintained a low deficit, so far this year. The BOI expects a deficit of 2.5% this year and a stable debt/GDP. The BOI appears very critical of the MOF pro-cyclical policy. With Israel at the top of the business cycle, the deficit should be lower. Any downturn in growth will push revenues lower and damage credibility. Trade data points to weak exports and growth in imports. This trend will keep economic growth weak in Q216 at 1.7% SAAR (our forecast, similar to Q1). The trade deficit is up 95% in the first seven months of the year. This factor should lower the CA surplus although FDI remains robust. The ILS has reached the strongest level this year (against the basket). We expect the CPI in July to reach 0.2% m-o-m and -0.8% y-o-y (to be published today). Seasonal factors will push prices of housing rentals, fresh produce and travel higher (but lower for clothing). Consumer confidence (CBS) improved in July to the highest level since 2012.Trade data points to weak exports as imports accelerate-Merchandise exports expanded by 0.7% SAAR in May-July following a decline of 13.3% in the previous three months. Exports have stabilized at a low level in recent months. -Meanwhile, imports of raw materials (excluding energy) are expanding, sug...

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