Israel: Vaccine success to drive strong recovery, shekel to outperform – CE

Israel’s rapid vaccine rollout will help to drive a strong recovery and analysts at Capital Economics are more optimistic than the consensus about the outlook for growth. In addition, inflation will remain firmly below the central bank’s target over the next few years and interest rate hikes are a distant prospect.

Israeli shekel set to outperform

“We think the foundations are in place for a strong recovery over the coming quarters. Israel’s IT sector should continue to thrive. And the re-opening of the economy should support a recovery in the labour market and household spending. We expect GDP to expand by 7.0% this year and 5.5% in 2022, pushing output to its pre-virus path in 2023. This is a more optimistic forecast than the consensus.”

“We don’t expect a sustained rise in inflation to the central bank’s 1-3% target. The causes of low inflation in Israel are structural and we don’t think there will be pressure on the Bank of Israel to tighten policy any time soon. We expect interest rates to stay at 0.10% until 2023.”

“A further rise in US Treasury yields mean that the shekel is likely to lose a bit of ground against the dollar this year. But structural forces stemming from low inflation, competitive exports and FDI inflows should allow the shekel to outperform major G7 currencies over the next few years.”