Israel's Post-War Economic Recovery Remains Moderate, Meitav Review Shows
Meitav Investment House's macro review reveals Israel's post-war economic recovery is more moderate than past conflicts, amid potential interest rate cuts and VAT reduction risks.
The Israeli economy is showing signs of recovery from the ongoing war, but this rebound remains significantly more moderate compared to recoveries recorded following previous military operations. According to a macro review by Alex Zhebzhinsky, chief economist at Meitav Investment House, public hesitation is reflected in only a moderate increase in credit card purchases and a substantial drop in the number of Israelis traveling abroad. Meanwhile, high-tech service exports appear positive in dollar terms, but the picture differs in shekel terms.
Interest Rates and VAT Reduction Risks
Following recent statements by the Governor of the Bank of Israel, the probability of an interest rate cut as early as the upcoming decision on July 6 has increased. Markets estimate that the interest rate could drop to a range of 2.75% to 3% within about a year. Zhebzhinsky also addresses the proposed 1% VAT reduction, arguing that the move—undertaken before the end of the war and amid uncertainty regarding defense expenditures—could increase deficit risks. Estimates suggest the VAT reduction would lower the Consumer Price Index by about 0.3% on a one-time basis.
"The proposed VAT reduction before the end of the war and amid defense budget uncertainties could significantly increase fiscal deficit risks," noted Alex Zhebzhinsky.
Global Uncertainty and AI Market Shifts
Globally, Zhebzhinsky points to substantial uncertainty. The OECD presented a scenario in which a swift resolution to the crisis with Iran and the reopening of the Strait of Hormuz would enable economic recovery and falling inflation by 2027, alongside a more pessimistic scenario where closures persist through 2027, pushing some nations into recession.
In the United States, activity shows signs of improvement, though Meitav notes that much of this is driven by massive investments in artificial intelligence infrastructure. Concurrently, private consumption is expected to remain weak. A key finding in the review concerns the AI revolution: alongside shortages in microchips and electricity, signs of "demand constraints" are emerging. Companies like Uber and Microsoft are scaling back certain AI applications due to high costs, as clients struggle to justify expenditures relative to productivity and profitability gains.
Labor Market and Investment Strategy
The review highlights the growing impact of artificial intelligence on the U.S. labor market, noting rising layoffs in sectors such as finance, information technology, and programming. Regarding investments, Meitav recommends diversifying beyond U.S. technology giants. Additionally, the investment house views U.S. government bonds as an attractive investment option, while advising medium- to long-term holdings in Israeli government bonds.
