| Dr. Gil Michael Bafman, Chief Economist, Bank Leumi and Viniv Bar, Economist in Leumi’s Economics Department |
| Israel’s growth rate in the third quarter of the year stands out positively in an international comparison
Israel’s gross grew in the third quarter of 2022, compared to the previous quarter, at a rate of about 2.1% (in annual terms, seasonally adjusted data). Although it is not a particularly fast growth rate, it should be noted that the figure of the Israeli economy stood out positively in an international comparison.
Israel’s growth rate in the third quarter of the year (compared to the previous quarter) is in the upper part of the distribution of OECD countries. Ahead of Israel, the USA (with a growth rate of about 2.6%), Sweden and Norway, Poland and Colombia. The growth rate of Israel’s economy in the third quarter of the year stood out positively, among other things, compared to the average growth rate in (about 0.8%) ), in the European Union (about 1.0%) and (about -0.7%).
We will also note that most Central-Eastern European economies, among them: Latvia, Slovenia, Hungary and the Czech Republic, stood out negatively. This, in the background of the negative consequences of the fighting between Russia and Ukraine.
However, it is important to note that the growth rate of the GDP per capita (standardized according to the population growth rate) of Israel is negative (minus 0.2%), and therefore does not stand out positively in an international comparison. Because Israel’s annual population growth rate is about 2% compared to about 0.0-0.5% among most OECD countries.
Israel also stood out positively in the examination of the growth rate in the third quarter of this year compared to the corresponding quarter last year (q3/21), as stated in the announcement of the Central Bureau of Statistics (CBS), which accompanied the publication of the national accounting data, earlier this month. Also, in Israel Ramat The GDP at the present time (q3/22) is about 12.5% higher compared to the level that was on the eve of the corona crisis (q4/19).
It should be noted that this is the highest rate among the OECD countries that published data, when there are countries that have not yet returned to the level of activity that was before the crisis, among them: Spain, Great Britain and the Czech Republic. Also, in the letter accompanying the latest interest rate decision from November 21, 2022, the Bank of Israel stated that “the GDP level in the economy continues to be higher than the pre-corona crisis trend line for the fourth quarter in a row.” A trend that is expected to continue in the coming quarters as well.
| The OECD’s growth forecast for 2023: Israel stands out positively compared to most developed countries
On November 22, the OECD published its latest macroeconomic forecast for the coming years. As part of the publication, the OECD highlighted the many challenges facing the world economy at the start of 2023. The global growth environment is slowing, inflation is expected to remain at a high level for an extended period of time, which has a negative impact on business and consumer confidence, and the level of uncertainty is high.
In order to deal with rising inflation, most central banks around the world, with an emphasis on the major economies, are in the midst of a continuous monetary reduction process, which includes raising interest rates in large portions within a short period of time. A process that is expected to continue in the coming months. This situation creates a macroeconomic environment that does not support rapid growth.
Indeed, the growth forecasts for the year 2023 have been revised downwards to a considerable extent in the most recent update dates, and at the same time, the inflation forecast has been revised upwards. In the current update, the growth forecast for the global economy stands at 2.2%, a significantly lower rate than the forecast for 2022 (3.1%) and the growth in 2021 (5.9%), as well as compared to the average for the years 2013-2019 (3.4%).
The slowdown in growth is expected both among the developed countries and among the developing countries. Most of the countries where contraction or growth at a particularly moderate rate is expected are European countries, while a real recession is expected in Great Britain and Germany. This, in the background of the energy crisis, which may lead to a real shortage of energy, resulting in a decrease in GDP and higher inflation among the European countries that are members of the OECD (on average). On the other hand, Asian countries are expected to lead global growth next year. The slowdown in the global growth environment is expected to have a negative impact on economic activity in Israel as well.
The OECD’s growth forecast for Israel’s economy in 2023 is 2.8%, a rate that reflects moderation to a growth rate lower than the economy’s growth potential (estimated at 3.5-4.0%), but high compared to most countries, with an emphasis on the developed ones, and therefore points to The relative strength of the Israeli economy. In our estimation, the year 2022 is expected to result in a growth of 6.0% and next year we expect a growth of 3.4%, among other things, thanks to the expected increase in natural gas export activity and the export of the defense industries.
| The Bank of Israel raised the interest rate by 0.50% to 3.25%, the highest level since 2011
The Monetary Committee of the Bank of Israel decided at its last meeting on November 21, 2022, at 50 basis points to the level of 3.25%, which is the highest since September 2011. We note that the preliminary estimates ranged from 50 basis points to 75 basis points We emphasize that the process of raising the interest rate by the Bank of Israel coincides with the interest rate increase in most developed countries, and in particular in the large developed economies.
In the text accompanying the interest rate decision, the Bank of Israel stated that the economy is above the upper limit of the price stability target (1%-3%) – at a level of 5.1% in the last 12 months that ended in October. It was also emphasized that inflation is recorded in a wide range of index items. In our estimation, the actual annual inflation (that is, in the last 12 months) is expected to remain above 5% in the coming months. This is a situation that supports further interest rate hikes, despite the slowdown in the current decision.
Inflation in Israel is lower than inflation in most developed countries. The Monetary Committee estimates that the processes of monetary tightening in Israel and around the world and the moderation of demand alongside the easing of supply chains and the drop in commodity prices work to moderate inflation. Apart from that, it seems that the reduction in the rate of increases was supported by the fact that the expectations for inflation for the first year from the capital market are within the target range, the expectations for the year from the other sources are in the vicinity of the upper limit of the target (3%).
Expectations from the capital market for the second year and beyond are within the target range. We note that the price stability target of the Bank of Israel is defined in terms of actual inflation of the total index and not in terms of expectations, which may or may not be realized. Therefore, actual inflation has a significant weight in determining the interest rate.
As part of the factors that allow further interest rate increases, the Bank of Israel noted that the Israeli economy continues to have robust economic activity and the labor market is still tight. The Bank of Israel anticipates that the restrictive monetary policy and the moderation in activity in the world are expected to lead to a certain slowdown in economic activity in Israel in the future, therefore the slowdown in the rate of interest rate increases in the current decision. As part of the risks, the Bank of Israel noted the economic activity in the world that is gradually moderating and thus the increasing risk of a recession, especially in Europe.
The Bank of Israel also points out that the number of transactions for the purchase of an apartment continues to decrease and the amount of mortgages taken out in recent months has been greatly reduced, and at the same time there is a significant increase in construction starts, which can indicate the forces that are forming, in our estimation, to curb the inflation of apartment prices in Israel and to stop the process of raising interest rates in the future. Looking ahead, we estimate that the process of raising interest rates will continue in the coming months. In the upcoming interest rate decision, at the beginning of January, the interest rate is expected to increase by another 25 basis points, to the level of 3.5%.
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 considered a recommendation or a substitute for the reader’s independent judgment, or an offer or an invitation to receive offers, or advice for the purchase and/or making investments and/or any operations or transactions. The information may contain errors and changes may occur. The bank and/or subsidiaries and/or companies related to it and/or controlling owners and/or interested parties may from time to time have an interest in the information presented in the review, including financial assets presented in it.