Bank Hapoalim economists estimate that the rise in energy prices has a relatively small direct effect on the Israeli economy – if you look at the energy-to-GDP ratio (an index of energy use petitions out of total GDP), it can be seen that between 1995 and 2020 energy use petitions fell by 38%.
The low deficit allows the government to use the budget to moderate price increases, for example by reducing indirect taxes on food prices. This year’s half-year pressures are lower than those of the last two years, but they still exist.
The overall picture is much more inflationary than we estimated a month ago for example. If we freeze energy and commodity prices at their current level, we expect very high price indices in the coming months: 0.5% for the February index, 0.7% for March, 0.9% for April and 0.5% for May. In the next 12 months, inflation will amount to 3.3%.
Bank Hapoalim economists also estimate that the first interest rate increase will be seen in the coming months, and two more interest rate increases by the end of the year. Interest rates in Israel are still expected to be lower than in the United States at any point in time in the coming year.
Israel
The daily volatility in commodity prices continues to be high, so for example the price of wheat fell by 8% last week and the price of a barrel of Brent for delivery in May fell from $ 124 to $ 112. The damage to the Israeli economy is indirect – trade relations with these countries are limited. Rising inflation and less expansionary monetary policy will work to slow the economy’s rapid growth in the second quarter of the year. The rise in energy prices has a relatively small direct effect on the Israeli economy – if one examines the ratio of energy to GDP (an index of energy use petitions out of the total product produced) it can be seen that between 1995 and 2020 energy use petitions decreased by 38%. Part of the explanation stems from a sharp rise in the output of technology industries whose energy consumption is small.
Similar to the global trend, the consumer confidence index in Israel is also declining, against the background of declining exchange rates in the financial markets and rising inflation. The economic indicators published by the CBS indicate a certain moderation in private consumption. In November 2021-January 2022, credit card sales increased at an annual rate of 1.8% compared to an annual increase of 6.3% in August-November 2021. In the coming months we are expected to see an increased departure of Israelis abroad, after two years of low travel abroad In the plethora of apprehension from Corona. The departure of Israelis abroad is expected to reduce local consumption.
The budget deficit continued to decline in February and in the last 12 months it amounted to only 2.2% of GDP. Tax revenues continued to grow at a rapid pace – 34% compared to last year (January-February). The sharp increase in revenues is due to both the rapid growth of the economy and the price increases in the real estate market, import prices and capital markets. The low deficit allows the government to use the budget to moderate price increases, for example by reducing indirect taxes on food prices.
A surplus of $ 6.6 billion in the current account of the balance of payments in the fourth quarter of 2021. The surplus for the entire year amounted to $ 22.5 billion, similar to the year before. Foreign direct investment in Israel has reached almost $ 30 billion. We estimate that in 2022 the surplus in the current account will decrease due to the rise in world commodity prices as well as increased emigration of Israelis abroad (export of services). Direct investment in Israel is also expected to decline due to declining technology stock prices. These amounts are expected to be offset upon the cessation of the Bank of Israel’s foreign exchange purchases. In any case, this year’s appreciation pressures are lower than those of the last two years, but still exist.
Inflation – Many variables enter the picture here: commodity prices, finance policy, immigration to Israel, which is expected to increase in the coming months, and more. The overall picture is much more inflationary than we estimated a month ago for example. If we freeze energy and commodity prices at their current level, we expect very high price indices in the coming months: 0.5% for the February index, 0.7% for March, 0.9% for April and 0.5% for May. In the next 12 months, inflation will amount to 3.3%. An early end to the war will lead to lower inflation. The Treasury may choose to mitigate the effect of some of the price increases, for example by temporarily reducing the excise tax on fuel. If immigration to the country increases, we may also see increasing pressure on rental prices, a factor that may further raise inflation. The bond market is now pricing inflation at an average annual rate of 3.9% over the next two years, but in the derivatives market inflation is considerably lower and is just over 3% per year.
The rise in inflation is largely due to exogenous factors, but there is also a rise in local factors such as rents and other services, and in light of the low unemployment rate, there is a risk that it will be based at a level higher than the target. We estimate that in the coming months we will see a first rise in interest rates, and two more interest rate hikes by the end of the year. Interest rates in Israel are still expected to be lower than in the United States at any point in time in the coming year.
global:
The continuation of the war in Ukraine, volatility around a high level of energy prices, the worsening of sanctions against Russia and a rise in the inflation environment were behind the negative performance of US stock indices last week. The Nasdaq was down 3.5% on a weekly basis, completing a 20% drop from its peak in November 2021. The Dow Jones and the S & P500 were down 2% and 3%, respectively. As in recent weeks, energy companies have stood out positively. European stock indices, which stood out negatively in the declines recorded since the beginning of the year, actually rose in the last week. The Eurostox 50 and 600 indices rose by 3.7% and 2.2%, respectively. In Asia, most of the stock indices fell by 3%, with the exception of the Hong Kong index, which fell by 6.2% (following the tightening of Chinese government regulation on companies traded in Hong Kong) and the Indian stock index, which actually rose by 2.3%.
High volatility while moderating world commodity prices. The price of a Brent barrel of oil, which before the war in Ukraine was about $ 95, has risen over the past week, albeit temporarily, to about $ 140 a barrel, mainly against the background of US President Biden’s decision to boycott oil imports And gas from Russia, and expectations for a similar step by European leaders. Towards the end of the week, the price dropped to $ 112 a barrel, apparently due to expectations of an increase in oil supply by OPEC member states (such as the United Arab Emirates) and due to expectations of progress in the negotiations to end the fighting. Despite the high level of the price of oil today, it is important to note that in real terms the price of a barrel of oil in the years 2007-2014 was at a higher level over time. The price index of all goods recorded a weekly decline of about 5%, led by the energy price index, which fell by 6.4%. The price of wheat in the United States also fell this week, by 18%, against the background of “encouraging” news about a large existing stock of the goods, which could meet the demand in the coming months.
In addition to a ban on energy imports from Russia, the US president called for removing Russia from the list of “preferred countries for trade”, a move that would allow the US and other countries to impose tariffs on imports from Russia. In another move, Biden decided to restrict the import of alcoholic beverages, seafood, and diamonds from Russia. Among the G7 countries, it was decided not to allow transfers of funds to Russia by the International Monetary Fund and the World Bank. In addition, the process of the departure of well-known multinational companies from the territory of Russia could be seen in the last week.
U.S:
Continued rise in the inflation environment. The consumer price index rose as expected by 0.8% in February, and by 7.9% in the last 12 months, the highest rate in the last 40 years. Core inflation has risen by 6.4% in the last 12 months. Wages in the US have risen by 5.1% in the last 12 months, meaning real wages have eroded, but it is still a wage increase that will make it difficult for the US Fed to reduce inflation. According to inflation forecasts for the coming months, the annual inflation rate in March and April will continue to rise and is even expected to approach a level of 10%. Meanwhile, year-on-year inflation expectations according to the University of Michigan Consumer Survey rose to a high of 5.4%, the highest rate since 1981. Capital market-derived inflation expectations also recorded increases last week. Five-year expectations rose from 3.19% to 3.52%, and ten-year expectations rose from 2.67% to 2.94%.
Consumer confidence in the US continues to decline. The first estimate of the University of Michigan’s consumer confidence index for March fell from 62.8 points in February to 59.7 points in March, the lowest level since 2011. Most of the decline was in the expectations index, probably due to the expected rise in inflation. The number of job vacancies remained close to the peak level in January, at 11.3 million jobs. The high demand for workers also continued in January, a month characterized by high morbidity from Corona. In January, some 4.3 million Americans resigned from their jobs, a slight moderation compared to previous months, and the rate of resignation fell from a record high in December 2021. It is estimated that with the moderation, more workers will return to the labor market, especially in the US.
Central banks will try to keep pace. A number of central banks, the main one being the US Fed, are expected to raise interest rates this week. According to most estimates, the Federal Reserve will announce on Wednesday a 25 basis point rise in interest rates, as a first step in a lengthy process of similar increases later on. The bond market is priced with a probability of over 50% that in one of the following decisions after March, an interest rate increase of 0.5% is possible. Accordingly, this week there has been an increase in yields to maturity on U.S. government bonds. The two-year yield rose from 1.46% to 1.75% and the ten-year yield rose from 1.69% to 2%.
Europe:
The EU and Britain have tightened sanctions on Russia. Between the measures, the access of factors in Russia to the capital market and the financial markets has been reduced. Additional banks were disconnected from the SWIFT money transfer system. The EU has severely restricted airspace to Russia, freezing President Putin and his foreign minister’s assets in European banks. Similar to the US, the UK announced a halt in oil and gas imports from Russia towards the end of the year. In contrast, the EU plans to reduce gas imports from Russia by about two-thirds over the coming year. Against the background of rising inflation expectations, the Central Bank of the Eurozone has decided to bring forward the termination of the bond purchase program from the last quarter to the third quarter of this year. It is likely that the first rate hike by the ECB will take place only after the completion of the bond purchase program.
China:
The regulator in the US capital market warns against the possibility of delisting five large Chinese companies from trading on US stock exchanges. This, in case these do not provide in the next two years accounting information required by the Supervisor of the Capital Market. Government officials in China are currently banning these companies from providing the requested information. Among these companies is the restaurant giant Yum China Holdings. With the conclusion of the annual National Congress, the Chinese government has set a growth target of about 5.5% for 2022. According to many analysts, this may be a slightly ambitious target, especially given the state of the global economy since the beginning of the year. The producer price index rose in February at an annual rate of 8.8%, slightly above the forecast.
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