This year, the world economy recorded a jump in inflation to levels not seen since the 80s, as a result of rising commodity prices, a shock on the supply side, wage increases and strong demand. In recent months, there has been a moderation in the inflation environment in the developed countries, however, its level is still significantly higher than the target. Discount Bank economists estimate that inflation will continue and moderate in 2023, however, it will remain higher than the target.
“The central banks of the world realized that, contrary to estimates in 2021, inflation is not temporary and raised interest rates sharply, in the US and the Eurozone, interest rates rose to 4.5% and 2%, respectively. The interest rate is expected to continue to rise in 2023 as well, however, the significant part of the interest rate increase is behind us. The interest rate in the US will rise up to 5% in the first quarter of 2023, after which it will remain stable at this level and begin to decrease towards the end of the year. The interest rate reduction is expected to be slow and gradual, and at the end of 2023 the interest rate is expected to stand at 4.75%. In the Eurozone, the interest rate is expected to rise to 3% and remain stable at this level until the end of the year.
“The global economy has been hit by the spike in inflation, however, so far only a moderate slowdown has been recorded, following a moderation in private consumption. The labor market, on the other hand, remains tight, unemployment rates are low and wages are rising at a rapid rate. However, we estimate that the erosion of disposable income and interest rate increases will lead to the worsening of the damage to the economy the world in 2023. The US economy is expected to record a recession and grow at a slow pace in 2023 and the Eurozone is expected to record a more severe hit. We estimate that starting from the second half of 2023, a gradual recovery is expected in the world economy, led by the USA”, they wrote in Discount.
Israel – inflation is accelerating and interest rates are rising
Similar to the global economy, inflation in Israel began to raise its head, with the recovery from the corona, and gained momentum with the outbreak of the war in Ukraine. In addition, a company for local supply-side inflation, demand-side inflation. The annual inflation rate crossed the 5% mark, a level not seen in the Israeli economy since 2008, and reached 5.3% in November. And if that’s not enough, the inflation very quickly turned into horizontal inflation which is the property of most of the index items, both products and services. Thus, about half of the items in the index embody inflation of over 5%, and about 70% – a price increase of over 3%. Therefore, in Israel as well, the “transitory” inflation that the central banks wished for, very quickly turned into a persistent and persistent price increase.
In the estimation of Discount economists, “inflation in 2022 will amount to 5.5%, while throughout 2023 we will see a moderation to a rate of 3.1% a year ahead, and 2.7% at the end of the year. The housing section will continue to be a significant factor in inflation, although it is expected, in our estimation, to moderate, in view of An expected increase in unemployment, an erosion of the real wage and an increase in the supply of apartments (an expected increase in the scope of construction completion). In addition, inflation in 2023 will be significantly affected by government measures, including: the abolition of the tax on soft drinks and disposable utensils, on the one hand, the increase in electricity and water rates and wage agreements In the public sector, on the other hand, in this context we note that the market is pricing in, a year ahead, inflation slightly lower than our estimate – 2.8%.
“Of course, in the background of the expected moderation in inflation, there is monetary restraint, which will continue. Indeed, the deepening of inflation forced the Bank of Israel to resort to aggressive monetary reduction, while raising interest rates from 0.1% in March to 3.25% at the end of November. However, in view of inflation The highest and most extensive, the Bank of Israel will, in our estimation, continue the process of raising the interest rate during the first quarter of 2023 up to the level of 4%, and will increase this level throughout 2023. At the same time, a high volume of MCM issuances is expected during 2023, following the trend we have seen recently, when it is expected Add and serve as a significant absorption tool by the Bank of Israel. The capital market is currently pricing in the Bank of Israel’s interest rate of 3.8% for the next 6 months, and about 3.4% at the end of 2023. In our estimation, and similar to the developed countries, this is, as mentioned, an underestimation,” Discount wrote.
The level of activity in the economy moderates and unemployment rises
The accelerating global and local inflation and the severe monetary restraint are clouding the growth of the economy. As a result, after a promising start to the year 2022, as a continuation of the recovery process from the corona, the second half arrived, and reality slapped us in the face. In view of the interest rate increases, rising inflation, declines in the markets and growing fears of a recession, the second half of the year opened with rather slow growth – 1.9%, about half of the economy’s potential growth rate, and even lower than the population growth rate (about 2.3%).
And just as private consumption was at the center of the damage from the corona and then led the recovery from the crisis, the dramatic change in the economic environment, especially the financial one, caused the positive momentum to be curbed, and it recorded zero growth. At the same time, there was a significant slowdown in the rate of export expansion, as a result of a retreat in industrial exports and a slowdown in the export of high-tech services. On the other hand, the rapid expansion in investment in residential construction continued, a trend that coincides with the sharp increase in construction starts.
Therefore, against the background of the rapid growth at the end of 2021 and the beginning of 2022, 2022 is expected to end with a growth of 6.2%. However, we should not be disappointed by this figure, which is affected, as mentioned, by developments that are a thing of the past, the second half of the year will be characterized by very slow growth, of about 2%.
Looking ahead to 2023, we assume that a growth rate of about 2.5% will continue to accompany us, when the two main growth engines of the pre-crisis – private consumption and the export of hi-tech services, will suffer from weakness. The increase in interest rates, the acceleration of inflation, the erosion of the value of financial assets and the increase in uncertainty will weigh on private consumption, and at the same time, the weakness in the global economy and the continued difficulties in raising capital, which the hi-tech companies encounter, will inhibit accelerated growth in this sector, as we knew before and during the corona virus. Indeed, defense exports will continue to benefit from rising demand, however, according to experts, the impact of an increase in defense budgets in Europe will be more pronounced in 2024, due to the slowness of the procurement processes of the defense ministries in Europe. In addition, in our estimation, even if these demands do translate into a significant increase in exports during 2023, this will not be enough to compensate for the damage to the economy.
The apparent slowdown in the local and global economy has consequences for the labor market, which are expected to intensify during 2023. The labor market, which suffered an unprecedented shock during the crisis, recorded an impressive recovery throughout 2021, and thus unemployment fell, until it reached a low of 3.3% in mid-2022, a low Even more so than on the eve of the Corona virus, and this with a noteworthy increase in the employment rate. However, the same cracks that were discovered in the last few months in the growth of the economy also spilled over into the labor market, and thus we saw the unemployment rate rise in November to 3.9%, while the participation and employment rates decreased. At the same time, it is possible to notice a decrease in the rate of vacancies, with the high-tech services sector particularly prominent, with a sharp retreat.
We will remind you that the high-tech sector is responsible for the absorption of nearly 30% of the workers who joined the labor market from the beginning of 2020 until the third quarter of this year, with the vast majority absorbed in the field of high-tech services. About 70% of the employees of the high-tech sector are employed in high-tech service companies, and the rest – in high-tech industrial companies.
Beyond the weakness in the high-tech sector, the streamlining moves we are witnessing and the preparation for a “closed day” cross sectors and fields. Therefore, combined with the expected slowdown in the coming year, we estimate that the increase in unemployment will continue, and may even rise beyond 5%.
**The forecast was written by the macro department of Discount Bank**