The disappointing US growth figures published last week indicate that the American economy, at least technically, has entered a recession. Even if we put aside the “dry” definition and assume that the American economy is not in recession, as evidenced by the central bank where it bases its explanations on the strength of the market The work – it’s still not encouraging news.
Beyond that, if you connect the dry data from the US to the IMF’s forecast for the world economy, which was lowered for the third time in less than a year due to the higher than expected inflation around the world, and the lack of certainty regarding the war in Ukraine – you have to wonder about the resilience of the Israeli economy.
Similar to the American economy, the Israeli GDP shrank in the first quarter of the year. Therefore, the question is, will the situation in Israel remain similar in the second quarter as well, after the GDP data in the US missed the forecasts – and pointed to the contraction of the GDP?
It is worth remembering that the 1.9% GDP contraction recorded in Israel in the first quarter came after phenomenal growth. As a result, it is currently difficult to speak in terms of a recession while the average forecast predicts a growth of 5% for the local economy in 2022, but the possibility of a slowdown can be discussed. Why did you slow down? Because the question is asked, why should the global slowdown skip over Israel? And if so, what are the reasons for this?
Apart from the influences that come to Israel from the world, the actions taken by the Bank of Israel to curb inflation, such as raising interest rates in a row similar to the central banks in the world, may lead to a slowdown and an increase in unemployment. However, the unemployment rate stood at 3.4% in June – a five-decade low. But the effect of the interest rate hikes on the real economy should be felt within a few months, and some would say half a year. So, what has happened since the first interest rate hike this year in April?
“Damage to purchasing power takes longer”
“The economic slowdown from around the world has not yet penetrated Israel,” notes Victor Behar, director of the economic department at Bank Hapoalim. “It can be seen that private consumption grew at a slower rate in recent months, and in June – even credit card purchases decreased.
“On the other hand, during this period there was a sharp increase in departures of Israelis abroad, and the number of overnight stays by Israelis in hotels in June was 18% higher than in the corresponding month in 2019. Inflation in Israel is lower than in the world, so it takes longer for damage to purchasing power to affect activity data. What’s more, the labor market is tight. Growth in Israel in the second quarter is not expected to be high, but probably not as negative as in the US either.
Behar estimates that two key factors illuminate Israel’s situation in a positive light in relation to the US and Europe: the first, the lack of dependence on natural gas prices, and the second – the good budgetary situation that allows the government to mitigate the damage to households, such as through the reduction in the price of fuel that came into effect and includes A reduction of half a shekel in the excise tax.
The global slowdown moderates inflation
As central banks navigate their way between inflation and recession, the impact of the global slowdown on domestic inflation may be positive. The slowdown in the world is curbing the inflation that originates from factors imported from the world, including a continuous decrease in transport prices and commodity prices. This, especially after the shekel’s power in curbing imported price increases weakened with the weakening of the currency in the second half of the year.
However, Bahar explains that some of the price increases have not yet been fully reflected in the consumer price indices – following a government policy that curbed some of the price increases, or stocks that existed and allowed the postponement of price increases.
At the same time, one of the signs of the recession, which indeed is occurring in both the US and Israel, is the behavior of the bond markets in both countries, even though the risks of recession in Israel today are not similar.
This can be seen from the yield curve, which reflects the gap between the yield given by the ten-year government bond and that of the two-year government bond.
Many believe that the inversion of the yield curve (a situation where the two-year yield exceeds the ten-year yield) signals an impending recession, since in most recessions that have appeared in the past they were preceded by such an inversion. The yield on the Israeli bond fell within six weeks by 0.9% to 2.4%, while the two-year yields are trading around 2%.
In other words, the direction is towards a flattening of the curve, since the Bank of Israel interest rate is expected to lead to an increase in two-year yields. The technical meaning of the inversion of the yield curve, from the point of view of the market, is that the economic cycle (cycle) of rising interest rates will encounter difficulties, since credit conditions will put pressure on the economy – and thus the next stage will include a slowdown that will force the central bank to lower interest rates.
Lowering the rate of interest rate increases on the horizon
After the American Fed raised interest rates at the sharpest rate since the 1980s, and Fed Chairman Jerome Powell raised the possibility of slowing the pace of interest rate increases in order to examine the impact on inflation – eyes are now directed towards the Bank of Israel ahead of the interest rate announcement on August 22.
What will be the monetary committee’s decision regarding the level of interest given the fact that the rate of inflation in Israel is lower than in the US? According to the forecast of the research division of the Bank of Israel, the interest rate in a year will be around 2.7%.
The expected interest rate in Israel in a year is 3%
Bahar explains that “the rate of interest rate increase in Israel is lower than that of the Fed and the interest rate gap between the Fed interest rate and the Bank of Israel interest rate is widening, which largely reflects the lower inflation in Israel at the moment.”
The expected interest rate in a year in Israel, according to the capital market, is around 3%. “At this time, the interest rate in Israel is expected to be similar to that in the US, except that there the interest rate will already be on a downward trend,” Behar concluded.
Bottom line, the dry data from the US do point to a recession, but it is still too early to decide if this period will indeed be defined as such by the body in the US responsible for determining it – NBER.
While the local economy data indicate that the situation of consumers has not worsened significantly, and the labor market remains tight – it is difficult to talk now in terms of a recession. And if in the end the economy does reach a slowdown, due to the high growth levels, it is likely that it will be premature to declare a recession – even if the growth in the second quarter will be negative.