Rising house prices to an annual level of 3.3% may signal that inflation is not just a result of a supply chain hit. Housing is the item that links inflation of assets to inflation in the consumer price index
Israel
The number of verified reached about 50,000 a day, and the number of those actually infected is probably much higher. There is a sharp decline in consumption, and especially that of services. In the seven days ended Tuesday last week, credit card sales fell 6.4% from the previous week. We estimate that, unlike last year, there will not be a sharp jump in domestic consumption after the Omicron has waned, in light of a different government compensation policy, and an erosion in household purchasing power. Economic growth will remain relatively high under the influence of expansionary monetary policy, and negative real interest rates. Investments in the economy, and in particular in the construction industry, are expected to continue to grow at a rapid pace. We expect growth of 4.0% in 2022, after growth of 6.3% in 2021.
The budget deficit in 2021 amounted to 4.5% of GDP, a sharp decline from a level of 11.4% in 2020. Most of the decrease was due to a sharp increase of about 30% in tax collection compared to 2020. Also compared to 2019, tax collection was about 19% higher. The deficit target for 2022 is 3.9%, a target that seems achievable, assuming no significant morbidity waves are seen after the omicron.
The December price index rose 0.3%, completing a 2.8% increase in 2021. The rise in the index was high relative to the consensus forecast. The housing section concentrated the bulk of the surprise in light of the acceleration in the rise in rental prices to an annual level of 3.3%. Another item that recorded a high increase is furniture and home equipment – 0.7% in December and 8.3% in 2021. The level of inflation is approaching the upper limit of the target, and it is possible that in the first months of 2022 it will cross it. We estimate that there are further price increases that will affect the indices of the coming months – food prices, for example, are expected to rise sharply due to the taxation of sugary drinks, electricity prices are expected to rise by 4.9% in February and fuel prices are expected to rise by 3%. Although the current wave of morbidity is leading to a sharp decline in economic activity and private consumption, we believe that, unlike previous waves, it will not moderate price increases.
Rising house prices to an annual level of 3.3% may signal that inflation is not just a result of a supply chain hit. Housing is the item that links inflation of assets to inflation in the consumer price index. We have raised the inflation forecast for the next 12 months to a rate of 2.2%, against the background of rising fuel prices, accelerating housing prices and higher world inflation.
Although annual inflation is expected to cross the 3% level in the coming months, inflation expectations are still anchored at the target, and this will allow the Bank of Israel to leave the interest rate unchanged in the first half of the year. The US Fed is expected to complete its bond purchases in March, after which the Fed’s interest rate is likely to rise. The Fed’s interest rate hikes will allow the Bank of Israel to begin normalizing interest rates at a slow pace, and with less concern about effects on the shekel’s exchange rate. The derivatives market now embodies two interest rate hikes this year and another two hikes in 2023 up to a level of about one percent.
The rise in US yields and the consumer price index for December raised shekel yields. The ten-year yield is currently trading at about 1.4%. The gap between US and Israeli yields remains relatively stable at about 40 basis points.
global
Along with the increase in the number of people affected and the slowdown in economic activity in the world, expectations of rising interest rates have been rising in the coming months, in a number of developed countries, especially the United States. The Dow Jones, S & P500 and NASDAQ indices fell 0.9%, 0.3% and 0.3% respectively in the past trading week, and from the beginning of the year they recorded declines of 1.2%, 2.2%, and 4.8% respectively. In Europe, indices Eurostocks 50 and 600 were down 0.8% and 1.3% respectively. Asian stock indices continued to record a mixed trend. Equity indices in India, Hong Kong and Taiwan rose 2.5%, 3.8% and 1.3% respectively. Japan and South Korea fell by 1% to 2%, with commodity prices rising, especially in the energy sector, over the past week. The index of agricultural commodity prices rose by 1.3%.
USA: Inflation in 2021 amounted to 7.0% and reached a peak of about 40 years. In December, the consumer price index rose by 0.5%, and the annual inflation rate reached 7%, compared with an annual level of 6.8% in November. This rate is the highest recorded since June 1982. Core inflation, which does not include energy and food prices, has reached an annual level of 5.5%. Most of the items in the index rose in the past year, with the most notable items contributing to the rise in inflation last year being rental prices (the housing section, which accounts for about a third of the index, rose 4.1%) and used vehicle prices (an annual increase of 37.3%). The rate of increase in the producer price index (PPI) in 2021 amounted to 9.7%. Inflation expectations from the bond market remained fairly stable. Expectations for two years were 3.24%, for five years 2.84% and for ten years 2.47%. Inflation expected for the coming year by households participating in the University of Michigan consumer sample rose to 4.9% (the highest level Since June 2008), higher than the expectations in the bond market which stand at 3.56% per year.
US: Rise in short-term yields embodies an expectation of a number of interest rate hikes in the next two years. The capital market now expects four rate hikes this year (to a level of 1.25% in the upper range) and another two to three rate hikes in 2023. The yield to maturity on two-year government bonds rose last week to 0.96% from 0.86% in the previous week. The yield to maturity on ten-year bonds rose from 1.77% to 1.79%.
USA: Slowdown in economic activity – Decline in retail sales and consumer confidence. Retail sales surprised with a 1.9% drop in December, apparently due to the increase in the number of infections, if also due to price increases. Online sales also declined. The first estimate of the University of Michigan Consumer Confidence Index for January indicates a drop from 70.6 points in December to 68.8 points, a low level of the index. The decline is mainly attributed to the expectations component, which dropped from 68.3 points to 65.9 points. In the labor market, there has been an increase in the new weekly demands for unemployment benefits to 230,000, the highest level since mid-November. In the first quarter of the year, a significant slowdown in the growth rate is expected, compared with previous quarters. The intensity of the deceleration will be mainly affected by the duration of the current corona wave.
Eurozone: In the summary of 2021, the growth rate in Germany amounted to 2.6% after in 2020 there was a decrease of 4.6% in GDP. Growth in the past year has been relatively moderate, so the level of GDP is still about 2% lower than the level at the end of 2019, before the eruption of the corona. Global supply chain disruptions are still hurting manufacturing activity in the country. As for the general situation under the Omicron strain, some countries are working to ease some of the restrictions imposed on activity. In the Netherlands, for example, the general closure will be lifted, and in other countries efforts are being made to shorten the isolation periods. France has eased some restrictions on passengers arriving from England. However, in Germany the restrictions on entry to restaurants and places of entertainment will be tightened.
China: Concerns are growing that the difficulties of financing and the recession in demand in the real estate industry will cloud the growth of the economy this year. According to reports, the big banks have tightened the criteria for financing activity in the industry. S&P and Moody’s have reduced the credit ratings of other large real estate developers in China. Given the moderate inflation environment and the slowdown in growth, the possibility of reducing the interest rate and reducing the liquidity rate set by the central bank cannot be ruled out in advance. This, of course, is in the opposite direction to the expected interest rate path in the US. As for dealing with the corona, the government has canceled a large part of international flights and increased restrictions on various activities. Before.