The Economist weekly this week called the new era after the corona – The era of predictable unpredictability. After so many surprises we have had since the outbreak of the corona the uncertainty has become structural. Workers changing their preferences, accelerating technological change, economic policies challenging past experience, and a return of East-West political tensions. 7% inflation in the US and a money-printing Fed is a combination we probably would not have gambled on two years ago. Introduce the economic trends that are emerging in 2022 in the world economy.
Israel
Israel is less affected than other countries than the Corona. Beyond the high proportion of the population that received the booster dose, there are also structural factors behind it such as the relatively low weight of foreign tourism in Israel’s product, the surge in high-tech industry activity and the increase in real estate investment. Although it is clear that there is no expectation of a growth rate similar to that of 2021, due to the comparison with a higher base. 2022, which is a significant factor in growth. Even if interest rates start to rise in the second half of the year, it is still very far from inflation, and this is a situation that encourages investment and consumption. With an approved state budget.
What will still stop the growth – the labor market has become tight and there is difficulty in staffing jobs. We think we should go back to examining the unemployment rate in the standard definition, and not build on the fact that workers who left the labor force during the Corona period will return to the labor force. The unemployment rate in its narrow definition stands at 4.7%, it is still higher than the level of about 3.5% we were in before the Corona, but the number of vacancies is higher than 140,000 people, which means that the difficulty of filling jobs is high.
Mention inflation first in its positive aspect for businesses – as long as interest rates do not rise, it creates incentives for rising activity. On the other hand, next year the public will also begin to feel the erosion in its purchasing power, whether it is due to higher food prices, or rental prices. In the summary of the effects of all these factors, we expect growth of about 4% in 2022, after growth of about 6.3% this year.
The unemployment rate continued to fall in the second half of November to 4.7%. The number of employed has been growing rapidly in recent months, and it has crossed that which was before the corona. The number of workers temporarily absent from work is now significantly lower than before the corona, and in our estimation this is another indication that the labor market is tight, and has the potential to intensify inflationary pressures. The average wage is now about ten percent higher than in the period before the corona, but it should be remembered that part of this increase has been eroded by inflation, and rising real estate prices that are not part of the consumer price index. 4% also in 2022.
The real estate market – supply responds to price increases, but the low interest rate still creates demand. The number of building permits is expected to exceed the level of 60,000 this year. In our estimation, the level of construction starts is expected to approach 60,000 units this year These construction volumes are higher than the natural increase in households in Israel during this period, a factor that should moderate the price increases in real estate. At the same time, in the near term the real estate market is still affected by low inventory of apartments, and low interest rates.
Inflation – Inflation in Israel is lower than in most countries of the world for two main reasons: the appreciation of the shekel and the independence of world natural gas prices. In neutralizing these, our inflation was probably quite similar to that in Europe. Prices of energy, goods and transport led to higher prices of products in 2021, and in recent weeks some of the prices of transport have fallen, and the rise in oil prices has also been halted. That is, most of the impact of rising commodity prices and transportation has already been reflected in 2021 inflation, but probably not all. Electricity prices, for example, are still expected to rise by 4.9% in February, and a further adjustment in food prices is expected. In 2022, a significantly more significant factor enters the picture than last year, and that is wage increases. As wages continue to rise, we will see an increase in the prices of the various services, and probably also in the prices of goods. Inflation, which focused on commodity prices, is expected to return to being more affected by services prices in 2022. We estimate that inflation will moderate from a rate of 2.5% in 2021 to a rate of 2.0% in 2022.
The exchange rate – it is difficult to sever the Gordian knot between the shekel and world stock indices, but if it is ignored, and the foreign exchange purchases of the Bank of Israel, then the data supports a strong shekel. It is high – about $ 22 billion. The large direct investments in Israel in the past year – $ 25 billion in the first three quarters of the year, are expected to be gradually converted into shekels for the payment of salaries, and they are also working to strengthen the shekel. And as long as the process is slow and gradual, the Bank of Israel will not try to prevent it either.
Monetary Policy – This is a year of global interest rate hikes. Central European countries have already started the process, England has joined and the Fed will probably start in the second quarter of this year. The Bank of Israel has more room to maneuver to wait with interest rate increases, in light of low inflation. We believe that towards the end of 2022 we will see the interest rate rise in Israel as well, out of considerations of financial stability.
global
In the summary of 2021, it appears that the world economy has largely recovered at a rate higher than the recession of 2020, even though the health crisis has accompanied us throughout the current year. The level of GDP in most OECD countries is now higher than its level at the end of 2019 and is converging to the pre-epidemic growth trajectory. At the end of 2021, world GDP grew by an estimated 5.6%, US GDP by 5.6% in the Eurozone by 5.2%, China by 8.1% and all emerging markets by 7.0%. Not all industries benefited from economic recovery, with industries dependent on interpersonal contact Like travel, tourism and leisure returned to operating only partially, while demand for consumer goods was strong, especially in the United States.
The global economic recovery was accompanied by an increase in the number of employed persons in the United States and Europe, but at the same time there was a sharp increase in the number of job vacancies, reflecting the change in employment preferences of many workers. .
In 2021, there was an increase in the inflation environment and inflation expectations in the world, against the background of the increase in commodity prices, and in particular energy prices, and transportation costs. Inflation in the 12 months ended November 2021 reached 6.8% in the US, in the eurozone to 4.9%. Leading prices have begun to fall recently, and there is a stabilization in energy prices and some electronic component prices, but inflation is still on the rise.
Most of the world stock markets recorded sharp price increases in 2021, against the background of the improvement in economic activity and the continued support of the central banks, and the rally year of Christmas did not disappoint either.. The S & P500 reached a new high last Thursday, despite a somewhat tense atmosphere in the markets against the background of restrictions and closures that will probably be imposed soon to curb the spread of the Omicron strain, and against the background that estimates that the Omicron is less dangerous than previously thought. In annual summary, the S & P500 rose 25.8% in 2021, the Eurostocks 50 rose 19.8% year-on-year, and the China Stock Exchange (Shanghai Index) rose 4.2 percent year-on-year.
The year 2022 opens with a sharp increase in the number of infected in the world from the omicron strain and a return to restrictions and closures in many countries. We estimate that these restrictions will moderate growth in the first quarter of 2022 in most countries, but that in the annual summary, the economic recovery will continue, albeit at a slower pace than in 2021..
Growth in developed countries in 2020 is expected to be high at a level between 4.0% and 4.5%, and in developing economies an average growth of about 5.2% is expected. Government debt, which rose sharply during the crisis, is expected to remain high, and with the expected rise in interest rates, it will be more difficult for governments to service the debt.
The unprecedented liquidity flows of central banks have managed to prevent the global economy from slipping into recession, but have also led in the past year to global price increases, which have raised fears of an inflationary eruption. Relying on capital markets, inflation expectations did rise sharply in 2021, but their level is significantly lower than actual inflation, and they embody a significant decline in inflation. In the US, for example, expectations are at a level of about 2.7% for five years. However, these expectations are a certain kind of “expectation”, and we estimate that they also embody a considerable probability of high stubborn inflation.
A number of central banks, including the banks of the Czech Republic, New Zealand, Norway and the United Kingdom, have already begun to raise interest rates during 2021, and by 2022 more central banks, led by the Fed, are expected to raise interest rates.
US – The average growth forecast of a number of leading entities for 2022 is about 3.7%. At the last Fed meeting, growth forecasts were updated upwards and the forecast for 2022 assumes growth of 4%. The unemployment rate forecast assumes that the unemployment rate reached 4.2 in November % Will continue to fall to a level of 3.5% in 2022. US consumer confidence indices indicate a mixed trend. While the Consumer Board’s Consumer Confidence Index came in handy, rising 3.9 points in December and maintaining a relatively high level, the University of Michigan’s Consumer Confidence Index remained close to its lows.
What will happen to President Biden’s social program? Democratic Sen. Joe Mancin’s opposition prevented the U.S. administration from passing in the Senate President Biden’s $ 2 trillion flagship program. Manchin has proposed to significantly reduce the size of the package of measures, especially in the planned activities on climate issues. According to reports, President Biden’s team will continue its efforts to reach agreements with the aforementioned senator.
Will the expected interest rate hikes curb inflation? At its most recent meeting, the Fed announced an acceleration in reducing tapering bond purchases. The tapering process has been accelerated to a $ 30 billion reduction in monthly purchases, so bond purchases are expected to be completed in March 2022. Also, Fed members now expect three rate hikes in – 2022 and three more raises in 2023. Powell noted that the delay in closing the bond purchases is expected to rise to the first interest rate rise – that is, from the end of the first quarter the interest rate could rise. The PCE index, which is the Fed’s preferred inflation index, is expected to rise by 2.6% Capital market expectations for the next five years are 2.7% inflation stocks.
The US yield curve has flattened, and it expresses a pessimistic assessment that a slowdown in growth, or a sharp correction in the markets, will prevent the Fed from continuing to raise interest rates beyond 2022. According to futures trading on the Fed, the market estimates that the Federal funds rate will reach 1.35% by the end of 2023, lower than the half of the Fed members’ forecasts, which stands at 1.6%.
Eurozone – In 2022, the recovery trend is expected to continue with a projected growth rate of 4.3%. Consumer confidence indices have been on a downward trend for several months, embodying the rise in public concerns. Growth in 2022 will be supported by strong private consumption, with households expected to continue to reduce their high savings rates. Investment is expected to be higher, partly due to national and European recovery plans. Unemployment is expected to fall close to pre-crisis levels. The bloc rose to 4.9% in November, the interest rate remained unchanged in the latest decision, and the president of the central bank, Guardian, estimates that inflation is temporary and that the interest rate will not rise until 2022.
China: Economic growth is expected to slow to about 5.0% in 2022. The rapid recovery in 2021 halted in the second half of the year, partly due to the emerging crisis in the real estate sector. April 2020. The prime interest rate on five-year loans remained unchanged. The reduction in the prime interest rate is consistent with the step of reducing the liquidity obligations applicable to commercial banks taken at the beginning of the month. The intention of these measures is to deepen the monetary expansion against the background of indicators of growing weakness in the economy, and in particular in the real estate industry.