Israeli Economy Shows Slow Recovery, AI Faces Demand Limits
The Israeli economy is showing signs of recovery from the war, but it is significantly more moderate compared to previous military operations, according to a macro review by Alex Zabezhinsky, chief economist at Meitav investment house. Public hesitancy is evident in a modest rise in credit card purchases and a significant drop in Israelis traveling abroad. While high-tech service exports appear positive in dollar terms, the picture changes when viewed in shekels.
Following statements by the Bank of Israel governor, the likelihood of an interest rate cut at the upcoming July 6 decision has increased, with markets anticipating a drop to 2.75%-3% within a year. Zabezhinsky also commented on the proposed VAT reduction, warning that implementing it before the war ends and amid defense spending uncertainty could increase the deficit risk. The VAT cut is estimated to cause a one-time 0.3% decrease in the price index.
Globally, Zabezhinsky highlighted significant uncertainty. The OECD presented a scenario where a swift resolution to the Iran crisis and the Strait of Hormuz closure could lead to recovery and lower inflation by 2027. A more pessimistic scenario, however, projects the closure continuing until 2027, potentially pushing some countries into recession.
In the U.S., signs of improved activity exist, largely driven by massive AI infrastructure investments. However, private consumption is expected to remain weak. A key finding regarding the AI revolution is the emergence of "demand limitations" alongside chip and electricity shortages. Companies like Uber and Microsoft are curbing certain AI uses due to high costs, as clients struggle to justify expenses against productivity gains. The review also notes AI's growing impact on the U.S. job market, with layoffs increasing in sectors like finance, information, and programming.
Meitav advises diversifying investments beyond U.S. tech companies into various sectors and views U.S. government bonds as an interesting investment. For Israeli government bonds, the recommendation is for medium to long-term holdings.
