Economists Expect Higher Inflation and a Stronger Shekel for Israel in 2018

The projected changes owe to rising commodity prices, global economic growth and a tightening labor market

Two hundred shekel currency banknotes
Bloomberg

Economists on the whole are predicting that 2018 will see higher inflation in Israel along with a strengthening shekel, according to the average of projections obtained by TheMarker.

The economists forecast a gradual return over the coming two years of the inflation rates that prevailed before the 2008 global economic crisis, and say they will also be accompanied by higher prices. That, the economists have said, would be the result of rising commodity prices, global economic growth and a tightening labor market.

There is also broad consensus among economists about a continued strengthening of the shekel against the world’s major currencies. The value of the shekel, it is suggested, will be buttressed by continued foreign investment in Israel and the major surplus in the country’s current account balance.

For the first time, the Finance Ministry will be relying in part on the consensus forecasts of outside economists in crafting its 2019 budget. Traditionally the ministry’s chief economist has used various economic prediction models regarding the Israeli economy’s performance, but this time, the forecast will be based in part on the consensus of economists beyond the ministry corridors, from investment firms, insurance companies, banks and government agencies. The ministry’s government revenue projections are based on such forecasts, and government spending is based in turn on the revenue projections.

Most of the experts polled by the Finance Ministry believe that the current record rate of workplace participation in Israel will be maintained over the next two years. Real wages, they forecast, will grow by 2.5% to 3.5% a year as a result of a rise in the minimum wage and as employers court skilled labor at every salary level. That will also lead, in turn, to a rise in private consumption.

As welcome as the rise in the real average wage would be, as inflation increases around the world, it is expected to lead the world’s central banks to tighten their monetary policies by raising interest rates. Economists say that such an occurrence is not already factored in by the capital markets and could lead to market declines.

Nevertheless, Israel is expected to see economic growth to pick up in the coming year. The year 2017 is expected to show GDP growth of 3%. Economists are predicting GDP growth in the 3% to 3.5% range in 2018, although if interest rates rise quickly, that could put a damper on future growth.

The economists are also forecasting accelerated growth in investment in Israel, particularly in the natural gas sector, along with uncertainty in the year ahead when it comes to the export of goods. Although exports from Israel by Intel and from the natural gas sector are expected to grow, there is concern over a drop in exports by Teva Pharmaceutical Industries, which has announced that it is slashing jobs and selling or shuttering manufacturing facilities.