Indicators point to strong investor confidence in Israel

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The performance of the stock market, inward investment, and a surprisingly high rating by "The Economist", are encouraging signs, though there are reservations.

Fourteen months into the war, there are at least three signs that the Israeli economy still enjoys the confidence of investors.

First of all, the return for the year on the Tel Aviv 125 Index has overtaken the S&P 500, with a rise of 28.5%, versus 24.3% for the US index. In fact, it’s hard to find an important index that has outdone the Tel Aviv 125. It should, however, be borne in mind that last year the local stock market substantially underperformed, against the backdrop of the government’s judicial reform program and the reaction to it, and the war that broke out on October 7.

The Israeli stock indices have exhibited strong rises mainly in the second half of this year. The fall in Israel’s risk premium and the ceasefire on the northern front gave the signal for an impressive rally.

Figures released by the Central Bureau of Statistics recently are another indication of high confidence in the local economy. In the third quarter, inward investment showed recovery, totaling $11.5 billion, the highest quarterly figure since 2021.

Furthermore, the current account surplus in Israel’s balance of payments grew. Between the fourth quarter of 2023 and the third quarter of 2024, a cumulative surplus was recorded of $24.8 billion. This compares with a surplus of $19.5 billion in the four quarters preceding the war. The figures mean that Israel exports more than it imports, leading to the accumulation of financial assets vis-à-vis the rest of the world and to upward pressure on the shekel.

In fact, the shekel has appreciated by more than 5% against the US dollar since the period just before the war. On October 6, 2023, the representative shekel-dollar exchange rate was NIS 3.863/$. Today’s representative rate is NIS 3.65/$. The strengthening of the shekel tends to depress inflation, bringing relief to the economy and to the individual. Economists see the foreign exchange market as still pricing in a risk premium, which means that if the war ends, the shekel has the potential to strengthen further.

Surprise from "The Economist"

"The Economist" has rated the strongest economies of 2024, and Israel ranks surprisingly highly. The 37 economies examined were rated in accordance with several criteria to see which had done best this year, such as growth rate, stock market performance, inflation, unemployment, and the fiscal deficit.

The best performing country was Spain, which two years ago shared fourth place with Israel. Then come Greece, Italy, Ireland, and Denmark, with Israel in sixth place after them (together with Colombia).

Israel’s strong macro figures pushed it upwards to its relatively high ranking, with the low unemployment rate and the performance of the stock market strengthening the country’s situation in recent months. Moreover, the way in which The Economist measured growth in Israel (from the fourth quarter of 2023 to the third quarter of 2024) creates a particularly positive picture: economic growth of 6.7%. "The Economist" explains the exceptionally high figure by the high growth in the first quarter of this year, after the downturn towards the end of 2023, when the war began.

There are, however, a few holes in The Economist’s method. The figures for Israel paint only a partial picture. Economic growth so far has been impressive, but the annual figure for 2024 will be much lower, with almost zero growth, while growth per capita will be negative.

There are also question marks over Israel’s future growth. Various international bodies, among them the international credit rating agencies, estimate that Israel will find it hard to return quickly to the growth rates that characterized it before the war. The fiscal deficit, which is expected to be 7.5% of GDP at the end of the year, does not receive much attention. It will be recalled that Israel’s credit rating has been downgraded more than once by all the rating agencies in the past year.

The survey by The Economist stresses the most positive aspects of the Israeli economy despite the war. Private consumption reflects optimism, and the country’s financial institutions are robust. The Bank of Israel is able to support the markets in the event of a market failure, as occurred with the exchange rate at the beginning of the war, when the central bank launched a program to sell $30 billion, although in the end it only had to sell $8 billion.

Other encouraging signs for the local economy are the strong shekel and the expectation that the rate of inflation will moderate over the next twelve months and will come within the Bank of Israel’s price stability range of 1-3%.

Published by Globes, Israel business news - en.globes.co.il - on December 23, 2024.

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