Northern escalation to impact Israel's economy - Bank of America

The government will be able to hit its target of a 6.5% deficit this year unless there is an escalation of Israel’s conflict in the North, according to a Bank of America mid-year review, published Thursday.

Much of the report’s analysis of the situation in Israel focused on comparing the outlook for Israel’s economy if the situation in the north escalates to if it does not.

“A new front opening in the North would increase the fiscal burden [on Israel] and weigh on our outlook” that Israel will be able to meet its deficit goal, said the report. Such a development would likely lead to further weakness of the shekel and delays to Bank of Israel interest rate cuts, it found.

Fiscal deficit remains large due to war-related expenditures

The report also found that while demand in Israel is recovering quickly, war-related expenditures are causing the fiscal deficit to remain large.

The recovered demand, coupled with Israel’s weak currency and increased tax rates is also boosting inflation, “while supply-side constraints continue,” the report added.

The bank predicted that Israel’s central bank rate will be at 3.75% at the end of 2025 – after pushing expectations for rate cuts to next year.

If there is no escalation in the North, Israel’s “economy should normalize gradually while the risk premium decreases,” the report found.

Bank of America also predicted that GDP growth would be 2.2% in 2024, and 3.5% in 2025, while consumer price index inflation would reach 2.8% in 2025, and drop to 2.3% in 2026.