Speaker 1: Bloomberg Audio Studios, podcasts, radio news. We are here at
Speaker 1: the IMF with the Bank of Israel Governor Amir your own,
Speaker 1: who is also the economic advisor to the Israeli government
Speaker 1: governing your own. Thank you so much for being here
Speaker 1: with us. What a week. It has been quite a
Speaker 1: different IMF week than usual. What's been your takeaway so.
Speaker 2: Far, Lisa, thank you for having me. I think it's
Speaker 2: clear uncertainty. The global economy seeing exceptional uncertainty. You know,
Speaker 2: most of the implications are that global trade will decline
Speaker 2: with it, global growth with declient make probably some tack
Speaker 2: up in inflation in the US. But the implications are
Speaker 2: far from clear. A lot of it will depend on
Speaker 2: what the final situation in terms of tariffs will be,
Speaker 2: what they're the duration of the uncertainty. But the word
Speaker 2: uncertainty is everywhere, and that's the key thing. That uncertainty
Speaker 2: in itself is weighing in on economy and on decision makers,
Speaker 2: whether it's companies, whether it's households, investments, and on sentiment.
Speaker 1: Earlier this year, you talked about it being very achievable
Speaker 1: for the Israeli inflation rate to get down between that
Speaker 1: one and three percent range this year. It's not that
Speaker 1: far away from it right now. Do you feel like
Speaker 1: we're still on a path. You're still seeing a path
Speaker 1: in Israel to that inflation rate enough to cut rates
Speaker 1: even twice later this year.
Speaker 2: So we've grown two percent in twenty three and one
Speaker 2: percent in twenty four, kind of quite a bit below
Speaker 2: our our potential, which is around four percent, but the
Speaker 2: Israeli economy has demonstrated great resiliency, enduring and an immense
Speaker 2: shock that we have. We predict that we will grow
Speaker 2: around three and a half and about four and a
Speaker 2: half percent in twenty five and twenty six, respectively, and
Speaker 2: this is after shaving a half percent due to tariffs
Speaker 2: Israel If I just say Israel's is exposed to the tariffs,
Speaker 2: but our primary because most of our exports are in
Speaker 2: the services, our primary focus and the way it can
Speaker 2: affect us is through the decline in global trade and
Speaker 2: if we see stock markets sustainably low, also through VC
Speaker 2: investment into our high tech area. In terms of the
Speaker 2: inflation and your question, we've had excess demand basically because
Speaker 2: of labor shortages. We've seen active demand and we need
Speaker 2: that process to come into balance. We see that process
Speaker 2: has started. We predict it will come into balance in
Speaker 2: the second half of the year, and with it, inflation
Speaker 2: will also continue to subside into our target, and we
Speaker 2: penciled in if that happens, we will be able to
Speaker 2: do somewhere like around two cuts. That's what the Search
Speaker 2: Department penciled in, two cuts by within a year from now.
Speaker 2: But I want to emphasize we are in a great
Speaker 2: uncertainty is very high, not just because of tariffs. We
Speaker 2: have our own geopolitical risk surrounding us, and therefore we
Speaker 2: are very data dependent. If we see this process moving faster,
Speaker 2: that is inflation decelerating faster, but we want to see
Speaker 2: inflation sustainably getting into the target, we can move faster.
Speaker 2: But on the other hand, if we see inflation sticky
Speaker 2: and we as market turmoil is happening, we see the
Speaker 2: shekel depreciate has depreciated, that has an effect on inflation,
Speaker 2: and if inflation in the US rises, we import some
Speaker 2: of that inflation. So there's a lot of risks that
Speaker 2: are tilted up, and if we see inflation stickier, we
Speaker 2: will have to be restrictive for a longer period.
Speaker 1: You know, it's amazing because most Central banks here when
Speaker 1: I talk about the immense shock, they're talking about tariffs.
Speaker 1: For you, it's different. There is a war going on.
Speaker 1: It is the Israel War in Gaza, and there's a
Speaker 1: real question here about how long it will go on.
Speaker 1: There was a feeling earlier this year that it was
Speaker 1: dying down. Now it seems to be inflaming once again.
Speaker 1: How much does that sort of set back some of
Speaker 1: these goals of getting people back to the workforce not
Speaker 1: necessarily deployed elsewhere.
Speaker 2: So the numbers that I've stated assume that we are
Speaker 2: going to be in the coming months in the current
Speaker 2: level of reserve usage and that will decline over time
Speaker 2: again in the second half of the year, and that
Speaker 2: will alleviate some of that labor shortage that we've talked about.
Speaker 2: We have in our forecast. Also what happens if we
Speaker 2: see farther escalation that goes on in Gaza, that goes
Speaker 2: on for another six months and bigger usage of reserves
Speaker 2: and there we shave an additional half percent of GDP growth.
Speaker 2: That's kind of the two scenarios that we've outlaid. But
Speaker 2: even around those, you can imagine there are many, many
Speaker 2: other configuration that one can face.
Speaker 1: You also are the economic advisor to the government, and
Speaker 1: I'm sure there are a lot of conversations about how
Speaker 1: to sustainably keep financing ongoing munitions, ongoing defense efforts, given
Speaker 1: that it is an uncertain time and given some of
Speaker 1: the pressures on the economy. You've made the case that
Speaker 1: it's important to cut spending rather than simply do this
Speaker 1: by debt financing. Why is that so important to you
Speaker 1: given the fact that this is a crisis and it
Speaker 1: is likely to be ongoing.
Speaker 2: A Israel is in a situation as you just mentioned,
Speaker 2: we have a lot of uncertainty that is very related
Speaker 2: beyond tariffs to the ongoing conflict, and that requires spending,
Speaker 2: and we want to demonstrate to the world that we
Speaker 2: continue to have responsible fiscal standing. And that amounts to
Speaker 2: basically allow even if you allow debt to GDP rise
Speaker 2: in the current year because of the war, you want
Speaker 2: to have a credible trajectory that it hasn't inverted u
Speaker 2: shape and it comes down. And you got to give
Speaker 2: the government credit as it did fiscal consolidation of one
Speaker 2: percent in the twenty twenty four budget and one and
Speaker 2: a half percent consolidation in the twenty twenty five budget
Speaker 2: basically according to the Bank of Israel, consistent with the
Speaker 2: Bank of Israel's recommendation. And of course whether we need
Speaker 2: to do more down the road will depend also on
Speaker 2: the geopolitical events and whether how far more will military
Speaker 2: spending need to be. But at least right now we
Speaker 2: can say we do not have a diverging debt to
Speaker 2: GDP process, and that is I think very important. And
Speaker 2: we saw it once the ceasefire in Lebanon happened and
Speaker 2: the budget was approved. We saw the Israeli CDs, the
Speaker 2: spread between the Israeli bond and US bond decline quite significantly.
Speaker 1: As the economic advisor, how important is it for you
Speaker 1: to see the war come to an end in order
Speaker 1: to fortify an economy that has been hit by tourism
Speaker 1: not being as robust as it has been in the past,
Speaker 1: and questions around ongoing investments in bound despite some of
Speaker 1: the tech investments.
Speaker 2: Let me just say, obviously we all want the hostages
Speaker 2: first and foremost. Coming back from an economic perspective, we
Speaker 2: all understand that reducing uncertainty and having at the end
Speaker 2: some kind of arrangements that provide for a sustainable, secure,
Speaker 2: situation that will help the economy, not just Israel, the
Speaker 2: region as a whole, and that will allow us to
Speaker 2: direct also more energy towards items like education, infrastructure, and
Speaker 2: enhance potential growth down the road.
Speaker 1: Right now, the source of volatility seems to be the
Speaker 1: United States more broadly at these meetings, and people are
Speaker 1: grappling with all sorts of uncertainty shocks that you've dealt
Speaker 1: with before in different capacities, And I'm just wondering whether
Speaker 1: that's going to stress the Israeli economy as well, based
Speaker 1: on the volatility and the gyrations in the US market
Speaker 1: and this sense of lack of clarity around the US
Speaker 1: role in all of this.
Speaker 2: So, first of all, I think everyone understands that uncertainty
Speaker 2: is weighing on the economy, the global economy, the US economy.
Speaker 2: We saw the whipsaw in the stock market, Israel's pensions,
Speaker 2: a lot of them are sitting in the in stock markets. Obviously,
Speaker 2: our high tech industry is funded a lot by US
Speaker 2: VC money. So to the extent that uncertainty weighs on
Speaker 2: those two things, that is also directly affecting our economy
Speaker 2: through that channel.
Speaker 1: What do you get the sense of when you speak
Speaker 1: to US representatives here, do you get some sense that
Speaker 1: things are going to calm down anytime soon?
Speaker 2: I don't know. I think the major issue is to
Speaker 2: come to sustainable arrangements and to reduce the uncertainty as
Speaker 2: fast as one as one can, and I think that
Speaker 2: will help the economy both here and abroad.
Speaker 1: Company, everyone, thank you so much for being with us today.
Speaker 1: That was Governor Amir Na of the Israeli Central Bank.