Economist predicts post-war turnaround for Israel

The financial markets have been in a storm for the past few weeks, with good reason. The shocking macro numbers and dramatic security and political events around the world have made uncertainty the name of the game.

“Look at the last month and see how many events we’ve had: the assassination attempt on Trump, Biden dropping out for another term and Kamala Harris replacing him, and The Israeli UAV that arrived in Tel Aviv, our attack on Yemen, and the killings near and far, “says Ofer Klein, head of the Economic and Research Department of Harel Insurance and Finance. “We have seen major shocks in the stock market after months of rising, from Japan and from the US. The system has been shaken,” he adds. Klein has been in his current role for more than a decade. He sits on all of the group’s investment committees, and has previously worked at the Bank of Israel and the Ministry of Finance.

“Globes” spoke to him about the turmoil in the markets, what will happen to interest rates in the US and Israel, and his optimistic view for the Israeli economy and the shekel after the war.

“The predictions are completely exaggerated, the Fed will not go there”

For now, let’s start with an analysis of the stormy week in the markets. What exactly happened?

“If we look at the macro level, we can see several clear trends. Global inflation is falling, but slowly. Why? Because the labor market is still strong. It’s true that a few numbers were released recently that put pressure on the markets, but if you look at the US labor market, the unemployment rate is still low – 4.3% in July On the other hand, US wages are is rising rapidly.

“The US is a service economy, and the main service sector is labor and wages. With wages rising at a rate of 3.5-4%, it is difficult to see inflation falling as quickly as we would like. .”

Employment figures for July in the US were weaker than expected, and showed a surprising rise in unemployment. The reaction in the stock market has been a sharp drop in Wall Street indices and suggestions that the US Federal Reserve has missed the coming recession, just as it reversed the tide of inflation when it started.

It seems that the market is very worried about the increase in the demand for jobs.

“We are not talking about 10% here, but only about 4.3%. It is true that what is worrying is the speed of the rise; the year started with 3.7%. I am very worried when I look into the numbers. In July, Employees 114,000 new jobs were added to the American economy, but 70% of them were in education and health. In sectors that we would like to see growth, such as high technology, workers were laid off.”

Markets have already priced in a much stronger interest rate in September, from 5.5% to 5%.

“It’s true, but expectations are one thing and events are another. The market is in a state of depression. Going back a few months, the market was expecting six interest rate cuts within six months. But after two numbers showing the strength of the US economy, he switched to predicting that there would be no rate cut at all this year , and now, after one weak number, the market is again talking about rates falling significantly this year, by 1% within two months. On the other hand, the Fed it will not go there.

What next number do you think could move the markets?

“The US CPI will be released this Wednesday. It’s too early to talk about inflation. As long as wages are rising at about 4% a year, it’s hard to see inflation slowing down.” . That number can change the markets again, but until then it is important to remember that I do not try to time the market, but to look at the long term.”

“The war will pass, and there will be recovery”

Ofer Klein knows Israel’s financial institutions from all angles, from the private market side to the Ministry of Finance and the Bank of Israel. At this point, he isn’t too concerned about the country’s big numbers, but he does offer things he says must happen the day after the fight. He says: “We entered the war in a very good position. “The debt to GDP ratio was 60%. We finished 2023 with 62%, and according to estimates we will finish this year with 67%. Compared to the world, our situation is still not bad . Even if the debt to GDP ratio is rising, the OECD average is close to 75%, unemployment and inflation are also high.

Who will pay this debt?

“War is obviously going to have an impact. Wars need money, and war has to be financed. And when you ask who is going to finance it, like in any country, the burden too much falls to the middle class, which can ruin the future.”

Should the rising deficit be a concern? This year’s target is 6.6% of GDP, and there is a high probability that we will exceed it. The deficit in July was 8.1% year-on-year.

“It makes no difference whether the government raises taxes now, which will hurt spending, or whether it raises the deficit, which means higher taxes in the future. Either way, we will have to to pay. The epidemic, the deficit rose to 12%, not to 7% like now. The war is not permanent. It will take time, and we will see a rise in the war. will be there.”

“In fact, the market has already lowered our credit ratings”

Rating agencies indicate the possibility of another downgrade of Israel’s credit ratings.

“Of course. The point is that the market is already pricing in. When you look at Israeli government dollar-denominated bonds against US government bonds, you can get an amount of Our risk premium is about 200 basis points. If you look at who’s rated globally, we’re talking about a worse rating than Italy, which is rated BBB-, and Romania’s situation, which is also rated BBB- So the decrease in ratings is not such a threat, because in fact the market is already lowering us.

How does this risk charge affect us as consumers?

“A high interest rate over a long period of time affects you when you go to take out loans. Ultimately, when you take out a loan, then the interest rate is high. It also affects everyone’s ability to make ends meet and buy things. , the interest rate also hurts the companies, because the companies are used no one works only with the money they have in their pocket they buy less.

What number do you think we should pay more attention to here in Israel?

“The fastest barometer is the foreign exchange market. It gives an immediate picture. If the exchange rate rises, I know that something has happened. It is a parameter that is really close to the markets. “

If we look at the foreign exchange market, the shekel-dollar rate is very high. Will the price drop continue?

“I hear a lot of people saying ‘the shekel will strengthen’ or ‘the shekel will weaken’ next month. There is really no way to decide. A coin toss will do the job, for sure. In the long run, after the war, “I believe that it will strengthen because of the plans of Israel. Every year, moreover, the savings of the Bank of Israel stand at more than $200 billion , and is the third highest in the world as a share of GDP.

“Despite the war, our interest rates will also go down”

Globally, interest rates are falling rapidly, but that’s not right on our agenda right now.

“The Israeli economy will not be an exception to world rates for a long time. That would lead to a very important strengthening of the shekel, which the Bank of Israel does not want, or a decrease in very important, which the Bank of Israel also does not want. keep interest rates higher than the world first and see interest rates fall in the US, Canada, Britain, the EU, Switzerland, Brazil, and any country you like except Japan, then, finally, Our interest rate will fall, despite the war.”

In conclusion, Klein believes that after the war we will see a change in the Israeli economy. “A large part of our GDP is made up of private consumption, but there is also investment and government spending. In general, when there is a sign of infrastructure – an earthquake , the war, etc. – once the event ends, the stage of recovery, and you see a great economic activity, I think we will see an annual growth of 4-5%.