Bank Hapoalim economists predict that the economy will register a moderate increase in growth in 2023, while the unemployment rate will increase; What is expected to be the rate of inflation and what challenges are facing the new government? 2023 predictions
The year 2023 is expected to open with a heavy cloud in the background that accumulated in the past year. The main areas of damage are the erosion of the purchasing power of consumers, following the price increases and the increase in interest rates, and the second is the damage to the high-tech industry – this is how Bank Hapoalim economists estimate in their forecasts for next year.
“Households tend to smooth consumption over time, and in the short term they reduce the savings rate. As time passes, the stage comes when they also reduce consumption. We estimate that the damage to the real incomes of households is greater than that reflected in the consumer price index (reasons which are related to measurement methodology), and the increase in the average salary, even if it is impressive, does not compensate for this erosion,” the bank’s economists wrote. “The young households, who tend to consume more than the average, are also affected by an increase of hundreds of shekels in mortgage repayments. In our estimation, the result will be a very moderate increase in private consumption of about 2.5%, that is, almost stability in the level of per capita consumption.”
The economists point out that the technology companies are, as mentioned, the second source of harm. “The big companies are cutting back on staff to offset a decline in revenue and financing expenses, and the startups are cutting back on staff to slow down the rate of ‘burning money.’ to continue,” wrote the Hapoelim.
On the positive side, the bank notes that the economy is in a great boom of investments, both in construction and in infrastructure. “We estimate that this will not stop in the coming year. The economic environment may be less favorable, but these are projects that are partially already in progress, such as the light rail or investments in the development of gas reservoirs.
“Also in the field of residential construction, although demand has decreased, and we also see a certain decrease in prices, we expect a high level of construction starts. The data for construction starts for the third quarter did indeed indicate a slight decrease in the rate of construction starts to the level of 9.61 thousand units excluding seasonality, but in our estimation , similar to the past, this figure is expected to be updated upwards, and it reflects a level of construction starts of more than 70 thousand units per year. In the last year, 80.2 thousand building permits were issued, so we would bet that if there is a decrease in construction starts, it will not be immediate. As of the end of the third quarter This year, approximately 165,000 housing units were under construction, a significant increase compared to previous years, which is due to the increase in construction starts and the lengthening of the average construction time. The lengthening of the construction period is affected both by the availability of the production factors, mainly workers, and by the complexity of the projects, for example towers and construction that includes a mix of uses.
“The bottom line is that economic growth will be 2.5%, which is a moderate increase of 0.5% in GDP per capita. In fact, we are already in a similar growth environment in the second half of 2022, so it is difficult to say that this is another significant deterioration compared to the existing situation. The services and industry sectors are thirsty for working hands and this is reflected in 141 thousand vacancies. Does this figure constitute a protective wall that will prevent an increase in the unemployment rate? Here it is less certain. In order for this to happen, there needs to be a match between the redundant workers and the demand for workers. The match is not only in skills, but also and especially in salary expectations. We It is therefore assumed that despite the great demand for workers, we may see a slight increase in the unemployment rate,” Hapoelim wrote.
Inflation will decrease
Hapoalim economists estimate that the slowdown in the economy and the decrease in inflation in the world will affect the decrease in the rate of inflation. The bank’s economists predict inflation at a rate of 2.8% in 2023. “There are still a number of price increases on the way, such as the prices of food, electricity, water and vehicles. These will affect the index in the first months of the year. Rent prices are also expected to increase at the beginning of the year. In half In the second half of the year, we estimate that we will see a change in trend, the increase in the prices of services will moderate, and we will also see a containment of the increase in rent prices. Much depends on the development of wages in the economy: inflation is on the expenditure side, and high wage increases are therefore a risk factor.”
The challenges of the new government: decrease in tax revenues
Bank Hapoalim economists estimate that the fiscal situation will change from end to end. “Inflation transferred income from households to the government. Tax revenues are positively affected by the increase in product prices (indirect taxes such as VAT), the nominal wage increase (tax rates are not updated within the year), the increase in real estate prices (for example purchase taxes) and of course from the sales of technology companies All of these are expected to change next year, and they will slow down the increase in the state’s tax revenues.”
On the expenditure side, the bank’s economists estimate that much of this depends on when the budget will be approved and if the expenditure limit will be changed. “In any case, it seems that the increase in spending will no longer be moderate. We are starting from a state of budget balance in 2022, and in our estimation we will move to a deficit of 2% to 3% of the GDP. The Treasury stopped issuing designated bonds in the past year and this means that the deficit will be mostly financed in the local market. Theoretically, this should push the yields upwards, but the level of the deficit is considered low, so this effect will probably not be substantial.”
The bank’s economists estimate that the interest rate increases will stop in the second quarter of the year at a level of 3.75%-4%, meaning two to three more interest rate increases of 25 basis points each. “Assuming that inflation expectations have fallen slightly to about 2.5%, this is a real interest rate of about 1.5% on the sources of the Bank of Israel. We assume that at this level the Bank of Israel will be able to wait to see if inflation does continue to fall towards the target. We estimate that the interest rate will stabilize at this level,
Even after we see the inflation in the target area, this is to ensure that the decrease is not temporary,” Bank Hapoalim concluded.