Bethel Finance: Citi predicts just 2% growth for Israel in 2012

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Bethel Finance news:

Citi Capital Markets is pessimistic about Israel's GDP growth in 2012, predicting just 2% growth, well below the 2.9% growth predicted by the OECD and 3.2% predicted by the Bank of Israel. Citi warns, "Israel, a very open economy, is likely to suffer an external shock which could hit GDP growth and put an end to an eight-year run of current account surpluses."
Citi adds, "There are some disinflationary pressures in Israel, which result from the slowdown and from price-cutting behavior that follows from Israel’s social protest movement, but the scope for further rate cuts could be constrained by rapid shekel depreciation. Global risk aversion has so far left the shekel relatively unaffected, as investors have concentrated on exiting from more heavily owned positions in countries whose balance sheets are much weaker than Israel’s. But we think Israeli asset prices will have a volatile ride in 2012, due to the size of the external shock Israel may be subject to, and to the risk of regional political disturbance, which is already being felt in Israeli asset prices."
Citi predicts that Israel's GDP growth will slow from 4.3% in 2011 to 2% in 2012 and partly recover to 2.9% in 2013. Export growth will slow from 6.4% in 2011 to 1.5% in 2012 and rise to 2% in 2013. The unemployment rate will rise from 5.5% in 2011 to 6.2% in 2012 and decline back to 5.9% in 2013. It predicts 2.3% inflation for 2011, 3% in 2012 and 2.6% in 2013.
Citi predicts that the shekel-dollar exchange rate will rise from NIS 3.60/$ at the end of 2011 to NIS 3.86/$ at the end of 2012 and NIS 3.75/$ at the end of 2013.
Citi says that while Israel's growth is losing acceleration and there are risks of a sharper slowdown, there will be no repeat of the 2009 recession. "Business and consumer confidence have fallen sharply in recent months, and the grim outlook for Eurozone growth suggests that the external shock facing Israel will intensify in the next few quarters: exports to the US and Eurozone account for around a quarter of GDP." Although the primary cause of the slowdown is external shock, domestic factors are also in play, reflected in the fall in home prices for the first time since 2008.
Citi adds, "Since much of the pressure on Israeli GDP is coming from a change in the external environment, the slowdown should produce Israel’s first current account deficit since 2003. The medium-term outlook for Israel’s balance of payments is still robust, due to the expectation of gas revenues later in the decade."
Citi gives two reasons for believing that the Bank of Israel will make more interest rate cuts. "In the first place, there may be some disinflationary bias resulting from the significant social protest movement that gripped Israel in July and August: supermarket chains have already agreed to cut prices and more benign pricing behavior could be evident elsewhere. Second, it seems that the fiscal consequences of the social protest movement may be neutral and not negative as we’d originally feared: it is likely that Prime Minister Benjamin Netanyahu will freeze plans to cut tax rates, and at least some of any increase in social spending can be financed by expected cuts to the defense budget. Yet the rise in regional risk - so far not priced in by markets - creates upside risks to the shekel-dollar exchange rate… A sharp rise in the price of foreign exchange would limit the Bank of Israel’s scope to cut rates."