| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
Key points in the weekly macroeconomic review of Harel Insurance and Finance economists:
| In Israel
The CBS surveys for December showed that despite the surge in the morbidity of companies and households, it did not decrease. This is in addition to the hotel and leisure industries, where there was a sharp decline in the total number of credit card purchases.
Government spending rose at the end of 2021, but another month of high direct tax revenues brought the annual deficit to 4.5% of GDP, about half of forecasts about a year ago.
The Bank of Israel has completed its bond purchase program, which in our estimation increases the chance of rising yields and volatility. Regarding foreign exchange purchases, we believe the Bank of Israel will continue, but given the improvement in the labor market and rising inflation expectations, we believe the purchase rate will be much lower.
| In the world
In addition to raising interest rates, the US Federal Reserve is also considering reducing the balance sheet. The announcement, along with the continued improvement in the labor market, has led to a sharp rise in bond yields.
U.S. corporate sentiment declined in December, but still remained positive. Industry companies are reporting bottlenecks and raw material prices.
Inflation in the eurozone rose to 5%, about half of that due to the surge in energy prices. We anticipate a moderation starting next month. We believe that contrary to US thoughts the European Central Bank will not raise interest rates this year.
| Consumer price index – this coming Friday
It is expected to rise by 0.1% this coming Friday. The expectations currently embedded in the market for indices in the coming years are higher than the expectations inherent in the US, and in our opinion, too high.
This coming Friday, the price index for the last consumer for 2021 will be published. In our estimation, the index will increase by 0.1%, while an increase in the purchase tax, food and clothing prices will be offset by the decrease in the price of fuel. It should be noted that there is uncertainty regarding the measurement of the prices of flights abroad, which decreased significantly due to the restrictions this month. This will bring inflation to 2.6% in 2021. Much higher than the forecast at the beginning of the year, but within the Bank of Israel target (1-3%).
Despite headlines in the press about price increases, our forecast for the next 12 indices stands at 1.8%. This forecast is significantly lower than the forecast in the bond market, which is already higher than the expectations inherent in the US. In our estimation, relatively low inflation along with the strength of the shekel will allow the Bank of Israel a wide margin of maneuver. We anticipate that interest rates in the country will not rise at least until the last quarter of 2022, even when we see a rise in US interest rates.
| The Bank of Israel will continue to purchase foreign currency, but less
The Bank of Israel’s foreign exchange purchases stood at $ 0.7 billion in December, lower than in recent months ($ 56 billion in the last two years). Capital, we believe that the rate of acquisitions will be much lower.
At the same time, the Bank of Israel has officially reached a ceiling of NIS 85 billion in government bonds.
High tax revenues (salary, capital market and real estate taxation) stabilized the deficit at a low level. In our estimation, the deficit will continue in the downward trend in early 2022, which supports Israel’s credit rating.
As at the end of each year, government spending skyrocketed in December, but in 2021 a record of about NIS 60 billion was broken (even after deducting aid program spending). Despite this, the deficit as a percentage of GDP surprised and fell slightly to 4.5% (in the last 12 months) – half the forecast at the beginning of 2021.
Another month of high tax revenues, which amounted to NIS 34.6 billion, contributed to this. The increase was recorded in direct taxes and especially in the increase in taxes on wages, the capital market and a monthly peak in real estate taxation (continued increased activity in light of the expected increase in purchase tax). In our estimation, the deficit will continue in the downward trend in early 2022, which supports Israel’s credit rating and the continued strengthening of.
| The US Federal Reserve is moving forward
Summaries from the recent interest rate decision show that some US Federal Reserve members are considering starting and narrowing the bank’s balance sheet at the same time as the rise, much earlier than previously expected. in March.
The initial report for December (published after the interest rate decision) is not expected to change the Bank’s policy when there is a moderate increase in the number of new jobs. Wages continued to rise and continued to fall. In December, 199,000 new jobs were added, about half of what was expected (data for the previous two months were updated upwards by 141,000). At the same time, the unemployment rate (calculated in a separate survey) fell more than expected to 3.9%, the lowest level since the crisis.
Despite expectations of faster tightening, it should be borne in mind that the consequences of the jump in morbidity are currently only partially reflected in the data.
| Despite peak inflation: The European Central Bank will continue to wait
In the eurozone, it rose to 5.0% in December (4.9% in November), according to the initial estimate, the highest level since the establishment of the bloc. A sharp rise in energy prices (2% of the contribution) and food (0.4% of the contribution) account for about half of the increase.
However, we believe that we will see a moderation starting next month when the VAT increase in Germany comes out of the annual calculation alongside the moderation in energy prices (which are still very high). Despite high inflation we still believe It has more weight in GDP compared to the US.
PDF document: The full macroeconomic review of Harel economists
The author is the head of the Economics and Research Division at Harel Insurance and Finance. The author (s) and / or members of the Harel Group and / or interested parties in them and / or the controlling shareholders of the Group, may hold and / or trade, for themselves and / or for others, the securities and financial assets specified in this review. This review should not be construed as investment marketing or an alternative to investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the opinion of the author at the time of publication, and this may change at any time and without further notice. The Company will not be liable, in any form, for any damage and / or loss caused, if any, as a result of relying on this review, nor does it warrant that relying on the information contained therein may yield profits.