Merrill Lynch: Economic growth to drop

Bank estimates Israel will record 3.5% growth in 2012 – higher forecast than Bank of Israel's but lower than previous predictions; dollar expected to hit NIS 3.65

Anat Tsipkin, Calcalist|Published: 01.11.12 , 08:04

"Israel is dependent upon developed economies particularly the euro zone, in which the growth rate in 2012 will be slow," Bill O'Neill, chief investment officer EMEA at Merrill Lynch, said Tuesday at the conference on 2012 forecasts held by the bank in Tel Aviv.

Merrill Lynch economists forecast a slowdown in Israel's economic growth rate in 2012. The bank's private banking division cited a 3.5% growth rate, which is relatively low to that of 201, when Merrill Lynch estimated the gross domestic product would grow by 3.9%.

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Last month, the Bank of Israel forecasted a lower 2.8% growth rate for Israel's 2012 GDP.

Regarding the dollar-shekel exchange rate, O'Neill estimated that the shekel would reach NIS 3.65 against the dollar, dropping from its record rate in 2011.

O'Neill also explained that due to concerns regarding the implications of global economy on Israel, the Bank of Israel would likely gradually drop the interest rate by only a half a percent to 2.25%.

It should be mentioned that in its last interest rate decision from December 26, the Bank left the interest unchanged at 2.75%.

Merrill Lynch EMEA Deputy Research Director Haim Israel added, "Israel's main problem isn't leveraging but exports, mainly to Europe. The problem in the country is not the policymakers, but how to deal with the implications of global economy. Private consumption is what's saving Israel's GDP."

Inflation to taper

Merrill Lynch believes that the inflation rate in Israel will shrink due to dropping consumer prices and the real estate market, estimating it will settle around the 2.6% mark in 2012.

"We don’t foresee any significant changes in the inflation rate in Israel which is reflected in a gradual reduction of the interest rate by the Bank of Israel," said O'Neill.

Haim Israel added, "No steep price drop is expected in the Israeli real estate market. Current real estate prices are affected mainly by the prevalent psychological state of mind.

"An historical perspective of the Israeli real estate market shows that in the event of a decline, there will be a single-digit decrease at the most and in any case, it will be very gradual, in real terms."