Has the decline in morbidity in Israel been halted? Increase in state tax revenues

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| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists

| The main points of the weekly review:

  • The decline in morbidity in Israel has been halted at the level of hundreds of new infections per day. Compared to Europe and even the United States, the situation in Israel looks excellent, and this is also reflected in the economic data, and especially in the data on state tax revenues.
  • GDP grew in the third quarter of the year at a rate of 2.4% in annual terms. The CBS has made a retroactive update of the data from previous quarters downwards, so this also has an impact on the growth forecast for the entire year. We now estimate that growth in 2021 will be around 6.3%.
  • Looking ahead, we estimate that inflation will remain close to the target center, under the influence of the appreciation, and probably also a less expansionary monetary policy next year.
  • The inflation inherent in the bond markets is high – about 2.4% per year for the next five years.
  • The decline in annual inflation in October reduces the chance that we will see the Bank of Israel ahead of the Fed in raising interest rates, as some European countries have done. We estimate that interest rates will rise next year near the time of its rise in the US.

| Israel

The decline in morbidity in Israel has been halted at the level of a single number of hundreds of new infections per day. It is probably difficult to get off this infectious rate without imposing restrictions or vaccinating the children. Compared to Europe and even the United States, the situation in Israel looks excellent, and this is also reflected in the economic data, and especially in the data on state tax revenues. In our opinion, the environment in Israel is considerably higher than that measured in the Consumer Price Index. For example, housing prices, which are not measured in the consumer price index, have risen by almost ten percent in the past year, and the producer price index has risen by 11.9% in the past year. A rise in the inflation environment usually gives a boost to the economy, and this is what we are experiencing now – a rise in residential construction, increased private consumption stemming from the wealth effect (rise in property prices) and the like. These effects will fade over time, as price increases erode the purchasing power of the public.

GDP in the third quarter of the year at a rate of 2.4% in annual terms. Excluding the impact of import taxes (mainly vehicles), growth amounted to 3.5%. Private consumption hardly increased in the second quarter, but this after an unusual jump in the previous quarter. The CBS has made a retroactive update of the data from previous quarters downwards, so this also has an impact on the growth forecast for the entire year. We now estimate that growth in 2021 will be around 6.3%.

The consumer price index for October rose by 0.1%. Inflation over the past 12 months has fallen to 2.3%. The rise in the consumer price index in October was significantly lower than the forecast (0.4%) and the seasonality for this month. The deviation from the forecast was in several items: Overseas travel prices decreased by 7.9%, under the effect of a decrease in flight prices. October. On the other hand, we saw a sharp 0.9% increase in food prices. Travel prices abroad were affected by an unusual reduction in flight prices, against the background of increased competition in the industry, and relatively low demand. In the last two years, the price of this item has dropped by close to 9% (the appreciation has also had an effect). On the other hand, it can be seen that the accommodation, vacation and travel item, which was not affected by a decline in demand or the exchange rate, rose in these two years to almost twenty percent.

Looking ahead, we estimate that inflation will remain close to the target center, under the influence of the appreciation, and probably also a less expansionary monetary policy next year. We see that inflation in the meantime is mostly imported from abroad and this is evident in items such as furniture and equipment for the home, food and vehicles. Slightly surprisingly, clothing and footwear prices continue to fall, although the import component there is high. We estimate that gradually the effect of global factors on inflation will decrease, while local factors such as rising labor costs will keep inflation close to the target center.

The inflation inherent in the bond markets is high – about 2.4% per year for the next five years. In the US, the five-year inflation has reached 3.0%. This can be seen as a bit of distrust on the part of the central banks’ assessments that high inflation is temporary. From falls in the capital markets and rising unemployment, the European Central Bank that wants to allow the weak countries to erode their debts, and the Bank of Israel that wants to curb the appreciation.

The low in October will allow the Bank of Israel to leave the interest rate unchanged at least until mid-2022. The Bank of Israel will probably try to reinforce the message that the expansionary policy is here to stay for a long time, and that foreign exchange purchases will continue to prevent abnormal changes and slow down the appreciation. From European countries.We estimate that interest rates will rise next year near the date of its rise in the US.

| global

Along with the good macro data in the US and the high profitability that emerges from the companies’ reports, there are concerns about the high inflation environment, the continued disruptions in supply chains, and the increase in the rate of infections from Corona, especially in Europe. These figures have mixedly affected investor sentiment and alongside a new record in the index there has been a mixed trend in the other stock indices in the last week. On the one hand, the Nasdaq index rose by 1.2% and rose by 0.3%. On the other hand, it fell by 1.4% and the Russell 2000 fell by 2.9%. In Europe, the indexes and 600 fell by 0.3% and 0.1% Particularly notable was the 4.4% decline in the Austrian stock index, which returned to full closure due to rising morbidity data.

Decline in energy prices and continued strengthening of the dollar in the world. The price of a Brent oil barrel fell for the fourth week in a row, down 6.5% from the end of October to $ 78. There was a decline in gas prices in the US as well as in coal prices, due to the imposition of restrictions in Europe and a decline in demand. In the foreign exchange market, the dollar strengthened by 1.5% against the euro and at a slightly lower rate relative to other currencies. Since the beginning of the year, the dollar has strengthened by 7.6% against the euro and by 6.8% against the basket. The yield to maturity of U.S. government bonds fell slightly from a level of 1.63% in the middle of the week to 1.55% last weekend. Moderate declines were recorded in the past week in inflation expectations derived from the US capital market. 5-year inflation expectations fell from 3.11% to 3.02% and 10-year expectations fell from 2.73% to 2.65%.

USA: Positive macro data signals a nice recovery of the economy. Rose by 1.7% in October, higher than in March, and September sales data were updated upwards. Data, which rose 1.7% in October, were also above and above the 0.7% forecast, and an estimate of industrial activity in the New York area also rose at a handsome rate. The leading index of indicators for October rose by 0.9%, and it is expected that in the last quarter of 2021 there will be a high growth of about 5.0% in annual terms. Construction start figures have continued to point to a steady decline since the peak in March. In October, there was a decrease of 0.7%, compared to the expected increase, and September data were also updated downwards. In fact, there was an increase of 4.0% in October, after the decrease recorded in the previous month.

At the political level, the Democratic bloc was able to approve the House of Representatives’ plan.Build Back Better Of President Biden in the amount of $ 1.75 trillion. These are measures with a social emphasis on items such as education, health and the environment. The next step is a debate and approval in the Senate, a very challenging task at this stage. Most estimates are that after many Senate debates, in which many changes will be made to the original proposal, the moves will be approved towards the end of December.

The financial world is eagerly awaiting the election of the next Fed chief. Most estimates suggest that President Biden will elect Jerome Powell for another term, a choice that is expected to be very convenient for Wall Street. However, some in the Democratic bloc support the election of Lyle Brainard, a member of the Fed’s Monetary Council, as Powell’s successor. Brainard is considered more of a “pigeon” than Powell on interest rate and monetary policy issues, though over the past few years she has always voted alongside Powell in council decisions. Brainard is known to be tougher than Powell when it comes to regulating the banking and financial system.

Eurozone: Rise in morbidity And the fear of imposing new restrictions And closures led to declines in stock markets and declines in yields to maturity of government bonds. Against the background of rising morbidity, many European countries have begun to impose partial closures and certain restrictions on activity. Among these countries are the Netherlands, Germany, Greece and Austria, which have already imposed a full closure. The yield to maturity of ten-year government bonds fell to minus 0.34%, the lowest rate in the last nine weeks. Beyond the increase in morbidity, the statements of the heads of theECB, Who stressed that for them the day is still far away when they will consider raising interest rates. In their view, the recent rise is a temporary phenomenon, and is expected to moderate towards mid-2022. As for data on business activity, the EU Automobile Manufacturers Association announced a 30% drop in sales of new cars in October.

Japan: contraction in third quarter due to weakness in private consumption and exports. According to published estimates, there was a 3% decrease in GDP in annual terms. The slowdown in private consumption was mainly due to the state of emergency declared in various parts of the country in order to curb the spread of the corona. The weakness in exports was mainly caused by disruptions in the supply chain, and in particular the shortage of chips. The Japanese government has approved a plan of greater than expected fiscal expansion, and a significant portion of the plan is aimed at improving the public medical infrastructure and strengthening the medical system in general.

The authors of the review are Bank Hapoalim economists. The review is based on data and information that were visible to the public. The data and information used to prepare it were assumed to be correct, without Bank Hapoalim Ltd. conducting independent tests in relation to the data and information. This review does not verify or confirm their correctness. This review is for informational purposes only, and does not purport to be a full analysis of all facts and all circumstances surrounding it. The information on which the review is based and opinions may change from time to time, without any further notice or publication. Of any investor. This article should not be construed as investment advice or a substitute for investment advice that takes into account the data, needs and special investment goals of each person, and should not be acted upon unless Independent opinion

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