Business sentiment improves modestly, but inflation concerns increase

ISRAEL - In Brief 09 Jun 2024 by Jonathan Katz

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Geopolitics: Israel continues its offensive in Rafah and missiles/drones continue to penetrate Israel from Hezbollah in the North, at generally a more intense level. Gantz (National Unity Party) announced his resignation from the war cabinet on Sunday, criticizing Netanyahu especially for not planning for the “day after”: who will manage Gaza after the war. There appears to be little progress in reaching a cease-fire with Hamas and the war drags on, with talk of an imminent escalation (infantry included) in the North. This has weighed on the shekel. The fiscal deficit continues to push higher, reaching 7.2% GDP LTM Expenditure is up 35% y/y in Jan-May (above the budget growth of 13%). On the other hand, tax revenues have also come in above expectations (up 2%), and the MoF has revised up their revenue forecast for 2024 by 16bn ILS. We see the fiscal deficit reaching 7% GDP this year, slightly above the 6.6% target. The downside risk is for further escalation in the region. The business sector is somewhat more optimistic May’s Business Tendency Survey points to a modest improvement in growth and employment expectations. The level of activity has improved modestly but is still below pre-war. Inflationary pressure is apparent, in both the inflation expectations for next month and the lack of workers in key sectors. On a positive note, the hi-tech service sector is expecting improving exports in June, as well as employment. On the other hand, consumer confidence declined sharply in May. We maintain our inflation forecast of 3.4% for the NTM. The shekel weakening last week by 0.65% against the basket. Freight shipping costs from Asia continue to push higher, up 27% to our r...