Preliminary estimates indicate that Israel’s economy grew 15.2% YOY in Q2 2021, driven by loosened COVID-19 restrictions and recovering business confidence. While government spending grew merely 3.8%, consumption, imports, investments, and exports recorded double-digit growth in Q2. COVID-19 hospitalizations have been on an upward trend since the end of July, which prompted the government to reimpose targeted restrictions on unvaccinated consumers, provide vaccine boosters to vulnerable groups, and launch antibody testing for children as young as age three. The new government has proposed a large collection of economic reforms, including streamlining import protocols in accordance with US and EU standards, fast tracking the process for obtaining licenses to open a business, creating competition for postal services, and potentially raising taxes.

Our View

Despite COVID-19 disruptions in the short term, we expect Israel’s economy to grow by 4.1% YOY in 2021 and 3.4% in 2022, driven by a rebound in consumption, a strong recovery in business confidence, and higher export sales. Moreover, we expect the shekel will likely strengthen into 2022, averaging between 3.15 and 3.25 ILS to USD in 2022, which will provide incentive for the Bank of Israel to keep borrowing costs low into 2022. Demand recovery, higher commodity prices, and the low base effect will cause an uptick in inflation into Q4 2021. Meanwhile, government spending will normalize further into 2022 as pandemic-driven emergency spending declines. Despite the likely ease in spending growth, the fiscal deficit will remain above the 3%-of-GDP target in 2022.

Business Implications

Ensure your business is well positioned to capture recovering demand and develop scenarios for a low-likelihood risk of temporary COVID-19 disruptions into Q4 2021. Equip your business with the tools and talent to remain competitive, as FrontierView expects some of the proposed reforms to be passed in the Knesset by Q1 2022. Expect a relatively stronger shekel to support the purchasing power of Israelis and increase local demand for imported products. Prepare for the risk of higher VAT on certain consumer products and a new tax on sugary drinks and plastic disposables from Q2 2022, which could exert some pressure on the consumer behavior of low- and middle-income earners. Target customers in manufacturing, construction, retail, and ICT, as they will outperform in terms of revenue growth. Monitor the budget debates in the Knesset, which must be approved by November, to identify areas that will receive more funding and position yourself ahead of the competition. 

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