JPMorgan cuts Israeli growth outlook, as Citi warns of further rating downgrades
US financial institutions see more downgrades as credit rating agencies are not confident about the government’s ability to keep its fiscal deficit under control as war costs rise
Sharon Wrobel is a tech reporter for The Times of Israel.
US investment bank JPMorgan Chase lowered its forecast for Israel’s economy for this year and 2025, citing recent macroeconomic data that “surprised negatively,” as the war with the Hamas terror group continues to rage for more than 11 months.
In a new report late Tuesday titled “Israel: Not a great combo of growth and inflation data,” the US bank reduced its 2024 growth projection for the local economy from 1.6 percent to 1.4% and its 2025 projection from 4.5% to 4.4%. That is lower than the Bank of Israel’s growth outlook of 1.5% for 2024.
JPMorgan analyst Anatoliy Shal cautioned in the research note that annualized growth at just 1.2% in the second quarter was “significantly below expectations” of its forecast of 5.8% and below consensus of 5.9%.
“The loss of momentum compared to 1Q was evident in high-frequency data, but the extent of it was certainly a surprise,” said Shal. “Business investment was the main negative news, along with a continued decline in exports.”
According to an initial estimate by the Central Bureau of Statistics published last week, gross domestic product (GDP) on a per capita basis, when adjusted for population growth, the economy contracted by 0.4% in the second quarter.
The economy had bounced back at the start of the year, growing by an annualized 17.3% in the first three months of the year following a 20.6% contraction in the last quarter of 2023, when the outbreak of war with Hamas in Gaza on October 7 sharply curtailed consumer spending, trade and investment.
Shal stressed that the “inflation picture remains difficult in Israel” after the annual rate in July surprised to the upside, climbing above the government’s 1-3% annual target range, to 3.2%, from 2.9% in June. JPMorgan said it expects inflation in 2024 to continue to rise to 3.3%, up from a previous forecast of 3%.
“We think that the Bank of Israel will continue to err on the side of caution near term, especially as the geopolitical environment remains tense, and don’t anticipate [interest rate] cuts at the next couple of meetings,” Shal remarked.
The central bank’s next rate decision is on August 28.
Shares on the Tel Aviv Stock Exchange dropped on Wednesday after Bank of Israel Governor Amir Yaron a day earlier urged Prime Minister Benjamin Netanyahu to speed up the process of debating and approving the 2025 state budget, stressing that financial markets were seeking responsible fiscal policy even during a time of war.
The Tel Aviv Stock Exchange’s benchmark TA-125 index and the TA-35 index of blue-chip companies fell between 1% and 2% as Yaron warned that fiscal discipline and budgetary adjustments were “critical to preserving the stability of the economy and strengthening the reputation of the Israeli economy,” during the war period.
Yaron emphasized that last week’s downgrade by Fitch of Israel’s credit rating also reflects “an assessment of the management of current economic policy and puts emphasis on future policy.” The downgrade will increase the country’s borrowing costs as the government raises more debt to fund war costs, but it does not reflect concern that Israel would not be able to repay its debt.
Fitch kept a negative outlook on the economy leaving the room open for additional downgrades as it raised concerns about the government’s management of the potential fiscal impact of war-related “additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.” It is the third global credit agency to cut Israel’s credit rating this year, following S&P and Moody’s.
Following Fitch’s move, Citibank assessed in a research report that Israel’s credit rating is likely to face further downgrades by Moody’s and S&P, according to reports in the Hebrew press. The US bank cited uncertainty about the end in sight of the war and growing skepticism by credit rating agencies about the government’s willingness to take the necessary difficult steps to bring the fiscal deficit under control by raising taxes or curtailing its spending.
“In our view, what drove the series of downgrades are doubts about the country’s ability and willingness to repair its balance sheet,” Citi said in the report seen by Israeli financial daily Globes. “In terms of further rating actions, we think the Moody’s rating looks most at risk.”
Citi forecasts economic growth of 1.6% this year, recovering to 4.9% by the end of 2025.
