| Victor Behar, director of the economic department at Bank Hapoalim, and Hapoalim economists
| Israel: In our estimation, economic growth slowed considerably in the fourth quarter of the year
The foreign trade data show a sharp decline in industrial activity and a decrease in the import of goods. The export of services for the month of October also indicated a decrease. The indicators for private consumption do continue to point to expansion but at a slower pace. As the level of transactions in apartments decreases, we believe this will also have an impact on private consumption.
The income tax rates were updated at the beginning of the year in accordance with the increase, which is expected to compensate households for salary erosion in 2022. This update as well as the opening of wage agreements in the public sector are expected to moderate the damage to private consumption.
In any case, we estimate that per capita did not increase in the fourth quarter of 2022, and this trend will probably continue in the next quarter as well.
| The sale of new apartments stabilized at a low level of 2,600 units per month
This is compared to an average level of 4,800 apartments per month in 2021. The decrease in the rate of sales led to an increase in the inventory of unsold apartments, and these reached the level of approximately 50 thousand apartments. This level is not considered particularly high, but the high interest rate makes inventory maintenance more expensive for the contractors. The increase in inventories increases the probability that we will see a turn in the coming months and a transition to a decrease in apartment prices.
| The government announced last week several measures aimed at curbing inflation
The planned increase in electricity prices is set to 2.5% instead of 8.2%, water prices 1.0% instead of 3.5%, and property tax prices have been frozen this year. The excise tax on fuel was reduced by nine cents. These measures have a short-term moderating effect on inflation, and we are changing the forecast accordingly (another update will be tomorrow after the publication of the December index).
The forecast for the month of January was updated downwards to a rate of 0.0% and the forecast for the month of February was reduced to 0.1%. The inflation forecast for the next 12 months was reduced to 2.7%. Some of the measures have an impact on the deficit, such as reducing the excise tax on fuel or indemnifying the local authorities for freezing the property tax.
Increasing the deficit has offsetting effects on inflation in the longer term, and the measures reduce the government’s ability to moderate price increases through the use of the budget later in the year.
| The year 2022 ended with an unusual surplus in the state budget
at NIS 9.8 billion, which is 0.6% of GDP. In our estimation, the picture in 2023 is expected to change from end to end. All the generators that resulted in a high real increase of 8% in tax collection are reversed this year: growth has slowed, a decrease in real estate transactions, a slowdown in high-tech activity and the revision of the tax rates.
We estimate that this year we will see a significant real decrease in tax collection compared to last year. On the expenditure side, it is difficult to know which of the clauses in the coalition agreements will be implemented this year, and in any case, by the time a budget is approved, we will already be in the second third of the year. We estimate that the budget deficit will reach about 3% of GDP this year.
| The week of Yissuf Had Beshar, the exchange of the shekel
Strengthened by 4.1% against the dollar and 2.2% against the basket of currencies. We estimate that the appreciation was due to the sharp price increases in the global markets, which resulted in foreign exchange sales by institutions.
| The markets now embody a rapid decline in interest rates during the year 2024
The derivatives curve shows an expected stabilization of the interest rate at a level of about 4% during this year, and then rapid interest rate decreases during 2024 to a level of about 3.0% at the end. The increase in expectations for an interest rate cut was influenced by a similar trend in the US, and it reflects the fear of a recession and a drop in inflation in the US.
We estimate that the decrease in inflation will become more and more difficult as we approach the upper limit of the target. As inflation stabilizes at a level of about 3%, the central banks will want to maintain a real interest rate of about 1%, so in our estimation the interest rate will not quickly return to the level of 3.0%.
| Global: The continued decline in inflation in the US and the Eurozone, and better-than-expected macro data led to another week of positive atmosphere in the financial markets
The positive performance on Wall Street was led by an index with a weekly increase of 4.8%, the index and recorded increases of 2.7% and 2%.
Stock indices in Europe continued with the momentum that started a few weeks ago. The index rose by 3.3% this week and the index in Great Britain rose by 1.8% last week.
Asian stock markets also had a positive atmosphere. The stock indices of South Korea and Taiwan rose by 3.5% on average. The B stock index rose by 3.6%, and in Japan and India the increases reached slightly below one percent.
In foreign exchange markets, it weakened by 1.6% relative to a basket of other currencies and by 1.8% relative to
| Commodity prices are on the rise
Perhaps against the background of the possibility that the opening of China will increase global demand for goods in general and oil in particular. The price of a barrel of oil rose by about 8.5% to the level of 85 dollars, and the index of all energy commodities rose by 6.6%. The price index for all goods registered a weekly increase of 3.9% and the price index for industrial metals rose 7.2%.
| USA: Similar to expectations, inflation moderates, but is still significantly higher than the target
Is 2% inflation an achievable goal? For the month of December 2022, it decreased by 0.1% similar to expectations, among other things due to a 9.4% decrease in the price of fuel as well as decreases of 2.5% and 3.1% in the prices of used cars and trucks and in the prices of flights.
Rate in the last 12 months (inflation rate for 2022) continued to decrease and reached a level of 6.5%, compared to 7.1% in the previous month. rose as expected by 0.3%, and the annual level fell to 5.7%, from 6.0% in November, the lowest rate in the last year. The increases in the services component and especially the increases in the rent section (an increase of 0.8% in the last month) continue to cloud the efforts to reduce inflation.
The service items are directly affected by wages, and as closely as possible, and given the changes in household preferences during the Corona period, and the trend of de-globalization, there are increasing question marks regarding the ability of the central banks to return to 2% inflation, and what the accompanying price is. If we assume that the central banks will settle for let’s say 3% inflation, which means taking a risk from their point of view, then perhaps it is possible to reduce the interest rate earlier and later this year.
At the same time, an interest rate reduction will reduce the chance that inflation will continue to fall, so the fall is limited, and in any case the central banks will not want to see a negative real interest rate again. These types of discounts can explain the behavior of the market in the last week and the expectation of an early interest rate drop.
We tend to estimate that the central banks will not be in a hurry to abandon the 2% inflation target, at least not officially, and it follows that interest rates have not fallen this year.
| USA: The economic indicators are surprisingly positive
An increase in the University of Michigan index. The first estimate for the University of Michigan’s consumer confidence index rose in January beyond expectations to a level of 64.6 points, compared to a level of 59.7 points in December. A notable increase was recorded in the current component, but the expectations component also increased this month.
Expectations for inflation for the year ahead decreased further to a level of 4.0%, a considerable moderation compared to the level of 5.0% in the October index. Expectations for the long term (5-10 years) remained unchanged at a rate of 3% per year.
In the labor market, new weekly claims fell to 205 thousand, the lowest level in the last three months. In the fiscal field, as the Minister of Finance emphasized recently, the US is approaching the federal debt ceiling of 31.4 trillion dollars and negotiations are expected between the White House and Congress in order to prevent non-compliance with other government obligations starting this June.
| US bond market: Government bond yields along the entire curve fell below the Fed rate
The moderation of inflation and expectations for inflation, as well as fears of a recession, led to a decline last week in yields to maturity on US government bonds. The yield decreased from 4.28% to 4.22% per year, and the yield decreased from 3.56% to 3.50%.
Recall that the 10-year yield was 3.83% at the end of 2022. The 10-year inflation expectations, derived from the capital market, dropped slightly from 2.21% to 2.18%, a relatively low rate.
| Europe: the data is surprising for the better, and the euro strengthened against the dollar and returned to the level from April 2022
The macro data of the Eurozone in recent months has been a pleasant surprise. An index in the Eurozone, published by Sentix, recorded another improvement this month and rose to the highest level since June of last year, but it is still in negative territory.
The average in the Eurozone for the month of November remained stable at 6.5% and the annual rate dropped to 9.2% in December 2022.
In Germany, zero growth was recorded in the fourth quarter (compared to the previous quarter in annual terms) and the unemployment rate in Germany is at a low rate of 3%. For now it appears that if there is a recession in Germany, it will be relatively short.
In the UK, it rose 0.1% in November, above the early estimates of a 0.2% decline. However, the estimates are that there will still be a recession in the coming quarters. As for the interest rate of the central bank in England, most estimates point to an interest rate increase of half a percent in February, to a level of 4%.
| China: The reopening of China has led to a sharp increase in the number of infections, and economic activity is struggling to return to normal
Against the background of the slowdown in global growth and disruptions in local production, it decreased by 9.9% last December compared to December 2021. Imports decreased “only” 7.5% and trade in the commercial account rose to 878 billion dollars, the highest monthly level in all of 2022.
Most forecasts indicate a moderate growth of about 4.5% in 2023, this is on the assumption that the country will soon be able to control the infections from the corona. The inflation rate rose to an annual level of 1.8% in December, and the core component also rose. In contrast, the producer price index decreased by 0.7%, after a 1.3% decrease in November, apparently mainly due to a decrease in demand for industrial products.
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