| Dr. Gil Befman, Chief Economist of Leumi, and Dudi Reznik, Interest Rate Strategist |
| The surplus of assets over Israel’s foreign currency liabilities continued to rise in the fourth quarter of 2021
Data from the Bank of Israel show that in the fourth quarter of 2021 the negative external debt amounted to a record amount of about $ 230 billion, which is about 48% of GDP, a figure that reflects an increase of about $ 17 billion compared to the third quarter of 2021 and an increase of about $ 28 billion Compared to the corresponding quarter in 2020.
This increase is due to a sharper increase in the debt assets of the economy abroad compared to the increase in gross external debt, which increased mainly due to non-residents’ investments in Israeli bonds. This development is in line with the increase in the holdings of foreign investors in tradable government bonds, which stood at about 10% in January 2022, similar to its level during 2021, compared with 7.5% in 2020 and 5.5% in 2019.
On the other hand, the total debt assets of the economy abroad continued to increase, among other things, with support for an increase in the Bank of Israel following the Bank’s acquisition program.
Since 2003, the Israeli economy has been characterized by a surplus of assets over liabilities in foreign currency, in all sectors of economic activity, which has grown over the years. Israel is in the position of a net lender of credit abroad, ie with a negative external debt.
This trend is another important indication of the strength of the foreign accounts of the Israeli economy, which are supported by a long-term trend of a decrease in external debt (gross) relative to GDP, which stood at 55% in 2007 and fell to a low of 26% on the eve of a crisis. The corona, and then rose slightly to a level of about 33% of GDP. This, along with a continuous increase in the debt assets of the economy abroad.
The state of the economy’s foreign accounts is positive and even continues to improve, and this improvement is reflected in terms of levels and also in terms of current net movements to Israel. This is against the background of a negative external debt (excess of assets over liabilities), which is supported by the flow of foreign currency that enters the economy each year.
In this context, we note that 2021 amounted to a surplus of 4.7% of GDP in the current account of the balance of payments, thanks to a record surplus of 8.5% of GDP in the services account (which was supported by rapid growth in exports of services, especially in high-tech and technology). In addition, the surplus in capital movements entering the economy continued, with 2021 amounting to direct investments by non-residents in Israel in a high volume of about 6.2% of GDP.
The set of data presented supports the strength of the shekel against the currency basket, a trend that is expected to continue in the coming years, excluding a temporary and transient event of exchange rate volatility, mainly against the background of global events affecting the financial markets.
| In February, the upward trend in total credit card spending continued in the area of services, which continues to recover.
In February 2022, the volume of credit card purchases by private individuals (in local businesses only) increased by 2.0% compared to the previous month and by 17.3% compared to February 2021, according to CBS data (Central Bureau of Statistics).
The increase in February was horizontal and included all areas of activity: services industries (insurance, tourism and hospitality services, flights and more), products and other services (computers and software, fuel, electricity and gas, equipment and communication services, etc.), industrial products (electrical products, furniture and clothing and footwear ) And food and beverages.
It should be noted that the services group stood out positively, thanks to a rapid increase in spending on tourism, flights and accommodation and leisure, areas of activity that were largely affected by the Corona crisis and are still in the process of recovery.
This finding is also reflected in the examination of spending data on credit cards from the Bank of Israel (daily data, which are published weekly, and are at current prices and deducted from seasonal effects), which indicate a rapid recovery in spending on tourism during February.
In addition, spending on credit cards in the restaurant sector has recently stabilized in an environment that is significantly higher than in early 2020. That is, the data set indicates a continued expansion of purchases in early 2022, despite the outbreak of the Omicron wave, which tightened corona restrictions.
However, our estimate, based on data from the Bank of Israel, indicates a moderate decline in the rate of purchases during March. A thousand, seasonally adjusted, reflecting an increase of about 80% compared to January, although still about a third lower than the level on the eve of the crisis), a trend that apparently continued during March.
As the volume of overseas returns returns to normal, the consumption of Israelis from abroad is expected to expand, in part, at the expense of expenses in local businesses, which may be reflected in a decrease in the volume of purchases in the local market.
The volume of credit card purchases remains in the vicinity of the potential trend route. This is in terms of the actual data against a theoretical route that assumes the continuation of the trend that was on the eve of the outbreak of the corona crisis, which was characterized by an average monthly growth of about 0.7% (in the period between 2015-2019). In March, the pace is expected to fall slightly below potential.
Looking ahead, we estimate that private consumption is expected to grow by about 7.8% in 2022. However, it should be noted that the security events that took place in the last week, which caused an increase in security uncertainty in the country, may lead to declining consumer sentiment. And ongoing.
| The continued expansion of economic activity in the economy is reflected in the decline in the “normal” unemployment rate back to its pre-Corona crisis level.
The employment data published by the Central Bureau of Statistics (CBS) show that in February 2022 the improvement in the labor market continued. , And stood at 5.4% compared to 5.6% in January 2022 (original data), mainly against the background of a reduction in the volume of excess unemployment created due to the crisis (workers who were laid off and unemployed who were laid off from the labor force, mostly due to the crisis).
An examination of the rate in its standard definition (only employed), according to seasonally adjusted data, shows that in January-February 2022 it stood at 3.9%, compared with over 4% at the end of 2021. The “normal” unemployment rate decreased to a similar level To that which prevailed on the eve of the outbreak of the corona crisis, reflects the process of recovery of the local labor market from the negative consequences of the crisis.
At the same time, the number of employed persons in the economy continued to grow and stood at about 4.14 million in February, a figure that reflects an increase of about 25.5 thousand employed persons (about 0.6%) compared to January and an increase of about 314,000 employed persons (about 8.2%) compared to February 2021 , During which the tightened third closure ended and the economy began to return to activity. However, it should be noted that this scope also includes workers who have been temporarily absent from work, including a minor extent of those temporarily absent due to the corona crisis.
| The U.S. labor market continues to show strength as unemployment returns to pre-crisis levels. The rate of wage increase continues to rise and may be another catalyst in rising inflation.
Rose in 431,000 jobs in March, dropping to 3.6% from 3.8%. The number of unemployed has dropped by 318,000 to 6.0 million and this is already bringing the labor market back to February 2020 levels (3.5% and 5.7 million), pre-Corona plague.
Although the volume of increase in employment was slightly lower than the average of forecasts, there were significant upward updates in the employment data of previous months. The figure for January was revised from 481,000 to 504,000, and the figure for February was updated from 678,000 to 750,000.
With these revisions, employment in January and February is 95,000 higher than previously reported. The amendments are due to additional reports received from employers and government agencies as well as a recalculation of seasonal factors.
The increase in employment continues in the field of leisure and hospitality, professional and business services, retail, trade and manufacturing. The labor force participation rate, which stood at 62.4% in February and March, and the employment-population ratio rose by 0.2 percentage points to 60.1%.
The number of non-employed people who currently want work has increased by about 382,000 to 5.7 million in March. The average wage rose in March and over the past 12 months, the hourly rate of increase has accelerated to 5.6%.
| There is a sharp decline in the business climate in Europe against the background of the war in Ukraine and the continued rise in energy prices
There has been a sharp decline in business expectations, which is only a preliminary indication of the impact of the fighting in Ukraine on European economies. This development is evident in the March indices of the Eurozone, with pronounced pessimism about future activity.
At the same time, “business climate” surveys at the local level (in Germany, INSEE In France andSTATE In Italy) pointed to a marked deterioration in economic sentiment, especially in the manufacturing and retail sectors. This negative trend is expected to intensify in the April data and be reflected in an economic slowdown. The rise in price components in these surveys has confirmed the significant rise on the cost side of companies, which do not bode well for a positive development of the economic outlook.
On the consumer side, confidence fell significantly in March, in the eurozone and the UK due to the sharp rise in prices and expected prices in the future. Energy prices were a major factor in this, with an explanation of about 70% of price increases.
In response, various governments have launched support programs to deal with the energy crisis, including subsidies for the purchase of fuel. At the same time, the number of corona cases continues to rise in Europe, but the volume of intensive care hospitalizations is still low and a return to significant economic constraints is not yet expected. In Italy, most of the restrictions are planned to be lifted on April 1 and in Spain corona laws for international travelers have been eased in order to increase tourism.
The Central Bank of Europe, theECB Surprised the markets in his announcements over the past month with a great deal of hawkishness. God- ECB Announced a rapid reduction in property purchases and expected increases. God-ECB Changed the wording of the expected sequence between the end of theTHAT And first the first rise in interest rates.
These statements, together with the acceleration of inflation and rising expectations, significantly raised the market’s expectation of an increase in interest rates by theECBWhen the market is currently pricing an increase of about 50 basis points in interest rates this year and there may be an exaggeration in the amount of tightening required in Europe, especially in light of the economic damage to the geopolitical situation in the European economy.
The policy dilemma of theECB It’s getting harder. Consumer confidence and future business indicators have weakened. But inflation rose in March, as inflation expectations “lost anchor” and there is a growing risk of recurring effects of inflation – of expected inflation – and wage demands, God forbid.
Further policy changes are expected to be announced by theECB During April, but this while emphasizing data vigilance, sensitivity and flexibility in policy. It is expected that theECB Will announce the completion of all asset purchases by the end of July and then the way will open for the first interest rate hike of 25 basis points in October and probably a further hike in early 2023, which will bring the deposit rate back from a negative level to zero.
| The eruption of the corona in China is giving its signals and the slowdown is being felt
Overall, the official composite index has fallen from 51.2 to 48.8, indicating that the economy is shrinking at the fastest pace since the start of the corona outbreak in February 2020. Business surveys are adding to existing information about major damage to services sector activity amid the latest virus wave In China. The damage to the industry seems to have been much more moderate.
There was a sharp decline inSMEs The official non-manufacturing activity index from 51.6 to 48.4, the lowest since last August. This reflects a sharp decline in the services index from 50.5 to 46.7 due to stringent traffic restrictions in China and a situation where consumers have become more cautious.
In contrast, the construction index rose from 57.6 to 58.1, which reflects a further increase in infrastructure expenditures against the background of an increase in fiscal support.
The industry also remained fairly stable and theSMEs Of production fell from 50.2 in February to a five-month low of 49.5 in March. There is a worsening of supply chain disruptions due to a shortage of manpower due to closure and onerous inspection rules. Delivery times have been greatly lengthened and there is a faster decline in inventory of companies. Demand also seems to be weakening.
There are also signs that the jump in commodity prices due to the war in Ukraine is affecting output prices in China and input indices and output indices have peaked since last October, so prices have risen due to power shortages. These point to a faster rise in manufacturers’ prices that are likely to be reflected globally.
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The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice for the purchase and / or execution of any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.