Bank Hapoalim (photo by Magma Images)
On the way to a government with a large majority in the Knesset. The work of forming the government will begin this week, and unlike the previous election campaigns, it is expected to be short, and accompanied by less uncertainty. From an economic point of view, the new government begins its journey with opening figures of high financial stability that will allow it a high maneuvering space for policy changes, including the realization of political agendas of the coalition companies. On the other hand, the figures point to an economic slowdown on the way, according to Bank Hapoalim’s economists.
Inflation, interest rate increases and the global recession are slowly seeping into Israel. Indicators for private consumption, such as revenue in the sectors of the economy, have long indicated a decrease in the months of June-August (in real terms). The increase in the export of services, including high-tech services, has also slowed down in recent months, and this is a branch of the economy whose contribution to growth has been high in the last two years. The growth figures for the third quarter are expected to be published next week, and in our estimation will show very low growth, if at all. Growth in the coming quarters is expected to continue to be low.
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The expected policy changes may affect the short-term price indices. For example, it is not clear if the excise tax on fuel will be raised in the middle of this month, when the tax on sugary drinks and disposable utensils will be abolished, and if the new government will try to set prices for controlled services such as electricity, water and property taxes. Additional legislative changes may affect the prices of the sample education section. The set of changes supports lower inflation in the short term, depending on the dates of the legislation and their scope. Looking at the longer term, the impact of the tax cuts is limited, and inflation is more affected by input costs and especially wages.
The wage data now show a very inhomogeneous behavior – in some industries there is a shortage of workers and the wage increases are high, such as for example hospitality and food services – a 6.4% increase in wages in the last year, or transportation services, mail storage and courier services – 5.7%. In high-tech, wages are also rising at a rapid pace, but in light of the reductions in the industry, it is possible that the wage increase there will stop. In industry, the wage increase is meanwhile relatively low – 2.4%. In an overall view, we estimate that the wage increase in the business sector still supports inflation that is higher than 2% per year, although not much above the upper limit of the target – 3%.
Another influencing factor that is expected to affect inflation is the real estate market. In our estimation, the expected slowdown in the economy will slow down the increase in rental prices, if there is a certain lag in the measurement, which results from the process of changing tenants, therefore in the coming months rent prices will continue to rise. We leave the inflation forecast at 2.9% for the next 12 months, this is on the assumption that the excise tax on fuel will not change. For the longer term, the capital market now embodies inflation that is closer to the upper limit of the target – 2.7% per year for a term of ten years, for example. This figure may also include a risk premium, This is in light of the change in the global environment.
The world’s central banks increased their determination in the fight against inflation, and the message from the Fed and the ECB was hawkish. The governor of the Bank of Israel also expressed himself in a similar way that the 3.5% interest rate will be reached quickly. We expect an interest rate increase of 50 basis points this month, followed by another 25 basis point rate increase. The interest rate is expected to stabilize around a level of 3.75%. The central banks aspired to reach positive real interest rates along the yield curve, and this was achieved in the US and Israel, although these are still low interest rates that do not guarantee inflation restraint. Inflation expectations are within the target range, although it is still difficult to say that they are “anchored” in its center. that the interest rate increase will continue in the coming months, as mentioned at a slower pace.
The yield curve in Israel is flat and even slightly inverted in part, with the two-year yield being higher than the ten-year yield. The gap in yields is small, and it reflects the market’s assessment that the interest rate will continue to rise to a level of about 4% and will decrease slightly in the second half of 2023. The market does not embody a sharp turn in monetary policy, so we do not believe that this is not an indication of a recession. The markets generally embody an assessment that the interest rates of the central banks both in the US and in Israel will not give up for a long time at the level of 4%.
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