GDP contraction in Q423 likely to be relatively modest

ISRAEL - In Brief 28 Jan 2024 by Jonathan Katz

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Recent economic indicators have been on the positive side: The BoI Composite Index increased by 0.4% m/m in December, and November’s print was revised upwards to -0.3% from -0.7%. Real time daily data point to strong private consumption growth reaching 4% above pre-war levels, in part due to the low number of Israelis travelling abroad. Hi-tech service exports increased by 1.6% m/m in November (+12.7% y/y). Hi-tech manufacturing is up 7.2% saar in Sept-Nov. Revenues from the various sectors increased by 4.6% m/m in November following a contraction of 13% in October. FX: The shekel appreciated last week by 1.2% against the basket of currencies, partially due to optimism regarding an imminent ceasefire. Moody’s is expected to release their Israel report at end-week. The approval of fiscal adjustments could possibly prevent a downgrade. The FX-passthrough on inflation has increased to 27%, according to BoI. Inflation: We revised our inflation forecast down slightly to 2.6% NTM from 2.7% due to the sharp shekel appreciation. On the other hand, shipping costs continue to push higher. The minimum wage will increase by 5.5 percent in accordance with the agreement with the labor unions, despite efforts by the Ministry of Finance to freeze it. The increase in the minimum wage is expected to cause pressure for upward price adjustments. The Bond Market: We revised our fiscal financing forecast for 2024 assuming the 6.6% GDP fiscal deficit target is attainable (the BoI currently expects 6.5%). We expect an average monthly domestic bond issuance of 13bn ILS. This quantity is manageable assuming fiscal credibility is maintained. Governor Yaron expressed support, calling the fiscal m...