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, sales of credit cards increased at an annual rate of 1.8% compared with an annual increase of 6.3% in August-November 2021. In the coming months we are expected to see an increased exit of Israelis This is after two years in which travel abroad was low due to the fear of 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 revenue 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 and an increased emigration of Israelis abroad (exports of services). Direct investment in Israel is also expected to decrease due to declining technology stock prices. Of the Bank of Israel. 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, however in the derivatives market inflation is significantly 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. The interest rate in Israel is still expected to be lower than in the United States at any point in the coming year.