BoI Lowers 2008 Growth Forecast

Stock markets the world over were sent reeling by the downbeat economic statistics released in the U.S. late last week, and the fear spread to Tel Aviv yesterday. The local mood soured further after the Bank of Israel admitted that its growth forecast of just a month ago was too optimistic.

A month ago the Bank of Israel had predicted that Israel's gross domestic product would grow by 3.6% to 4.4% in 2008. Now the needle on its virtual gauge is approaching the bottom of that range.

On Thursday oil touched the psychological barrier of $100 per barrel, and later the U.S. Institute for Supply Management said its stats signaled that U.S. economic activity was contracting. On Friday it turned out that the U.S. had created just 18,000 jobs in December instead of the predicted 70,000, the slowest pace since August 2003. When the economy is growing, it produces about 150,000 jobs a month. And thus Tel Aviv's screens turned red yesterday.

The TA-25 index lost 2.5% and the TA-100 index dropped 2.3%, as did the Real Estate-15 index. The TelTech-15 index sank 4.6%, dragged down by dual-listed stocks that tumbled on Wall Street late last week. The MidCap-50 index lost 3.4%. Total turnover was heavy at NIS 2.6 billion, compared with the average of NIS 2 billion a day in 2007.

VeriFone was among the most active stocks, tumbling 7.4%, and Alvarion, also dual-listed, dropped 5.4%. Biotech smallcap Mellanox dived 10.3%. Teva was the liveliest share of the day, losing 0.3% on turnover of NIS 150 million.

Yesterday the Bank of Israel issued updated forecasts, predicting that Israel's first-half economic growth will be depressed by slowing global growth, most notably in the United States. Dr. Karnit Flug, manager of the central bank's research department, told TheMarker that the month-ago forecast of 4.4% had been based on an optimistic scenario, while 3.6% had been based on the pessimistic one, assuming that the American economic woes would spread around the world and that Israel's security situation would deteriorate.

The optimistic scenario had assumed that Israel's business product would grow by 5.4% in 2008, Flug explained. That seems less likely if world demand for Israeli products becomes depressed by the global economic condition. Also, that rosy scenario had been based on figures provided by the International Monetary Fund, which have not been changed. But the IMF has said it will be revising its forecasts downwards.

It isn't that the central bank thinks the optimistic forecast is doomed, just that it has become less likely. Flug stresses that few believe the U.S. will develop a full-blown recession, but its economic growth, and that of the world, is likely to slow, she says.

Analysts are also expecting Israel's economy to be buffeted if the U.S. slumps. Psagot Ofek chief analyst and strategist Vered Dar's forecast for Israel is slumps in consumption and in the real estate sector. She notes that depressed demand for Israeli products means a local slowdown.

"But Israel's exports to the U.S. is based on high-tech, which isn't expected to slow down there," she adds. "Even if the American economy goes through hard times, Israel is destined for a softer landing." She predicts that Israel will sustain "healthy economic growth".

Dr. Michael Sarel, the head of the economics and research department at Harel, doesn't think the U.S. is headed for a recession; his forecast is that the slowdown will worsen.

In any case, even if a recession develops, it won't hurt Israel, which isn't that sensitive to the American housing market and consumption habits. "On the other hand," Sarel warns, "if recession is caused by the credit crisis, liquidity in Israel will be much more badly hurt. Foreign investment in Israel will diminish, and all the financial markets around the world will suffer from falling asset prices."