The budget deficit decreased in the 12 months ended October to 5.5% of GDP. The termination of the assistance programs and the continued increase in tax collection explained the decrease in the deficit.
The high inflation data in the US and Europe increase the risk of a rise in price increases for Israel. Our inflation forecast is 1.9% for the next 12 months.
Given that fiscal policy in Israel is not as expansionary as in the US, the Bank of Israel can afford flexibility in monetary policy, and waiting for the US Fed. Interest rates in Israel will begin to rise in our estimation near its rise in the US in the second half of 2022.
Israel
Foreign trade data for October as well as data on state tax revenues are a good example of two processes that are currently taking place in the economy: rapid growth and a sharp rise in prices.. Israel’s imports of goods rose in the first ten months of the year by 15% compared to the same period in 2019, and we estimate that a large part of the increase is attributed to the rise in energy prices and raw materials. A similar picture can also be seen in the rapidly growing export data (in dollar terms) due in part to world price increases of chips, pharmaceuticals and other industrial products. State tax revenues are affected by the same factors: growth and price increases. Tax revenues increased by 19% from the beginning of the year compared to the corresponding months in 2019, while GDP in this period expanded by only 4.4%, and no taxes were raised during the period. The large gap between economic growth and the sharp rise in data such as foreign trade or tax revenues is due in part to price effects: rising commodity and freight prices, a surge in real estate and stock prices, and technology companies flooding in value. But they do affect activity variables, including state tax revenues.
The budget deficit decreased in the 12 months ended October to 5.5% of GDP. The termination of the assistance programs and the continued increase in tax collection explained the decrease in the deficit. The budget approval in the government is expected to increase the spending side in the coming year, so in our estimation the decline in the deficit will not continue at this rate. Achieving the deficit target for next year (3.9% of GDP) now seems achievable. The credit rating company Fitch has issued a statement stating positively the positive fiscal developments in Israel.
High inflation data in the US and Europe increase the risk of a rise in price increases for Israel. Meanwhile, there are factors that moderate inflation in Israel, such as appreciation and non-increase in electricity prices (due to natural gas). We estimate that there are still a number of price increases for items such as housing, furniture and household equipment, clothing and footwear, and food that will lead to high increases in the price indices of the coming months (relative to seasonality). The average wage in the economy was 8.6% higher in August compared to August 2019, and over time this is a figure that is important to follow – if wage increases continue at a rate of more than four percent per year, inflation will remain high. The public sector wage agreement includes a wage freeze in 2022 and a moderate increase in the minimum wage – 13.2% by 2025. This agreement moderates inflationary pressures, but wages in the private sector are more important, and excess demand for workers is a risk factor, which may leave inflation high. Our inflation forecast is 1.9% for the next 12 months.
Given that fiscal policy in Israel is not as extensive as in the United States, the Bank of Israel can afford flexibility in monetary policy, and waiting for the US Fed. Some of the central banks, other than the Fed and the ECB, have long raised interest rates, usually against the background of higher-than-in-inflation inflation in Israel. The exchange rate is expected to be a major consideration in the timing of interest rate hikes here, especially in terms of creating expectations that may materialize – low interest rates in Israel today have no significant effect on capital movements to and outside the economy, but raising interest rates can create expectations. Interest rates will begin to rise in our estimation near its rise in the US in the second half of 2022.
global
Inflation data in the US were the focus of news last week. An annual increase of 6.2% in the consumer price index has not been remembered since 1990. In Europe the situation is a little more tolerable with inflation at 4.1%, but even there it will probably rise further. Central banks are still convinced Temporary though less so than before. High inflation transfers economic resources from lenders to borrowers – this creates tension when it comes to a country like Germany whose citizens have eroding financial wealth, and on the other hand debt-ridden countries in southern Europe, are the biggest beneficiaries. With inflation at 6.2%, chairman The Fed, sounding half-apologetic about the need to cut bond purchases, is trying to suppress the possibility of a rise in interest rates next year. Both in the US and in Europe: the Democratic Party would like to see a patient Fed, which allows among other things to implement their budgetary policies and maintains the positive momentum in the markets. In Europe, as mentioned, inflation eases the debt burden on some countries.
The sharp rise in the US inflation rate contributed to the decline in Wall Street stock indices this week. In the weekly summary, the Dow Jones, S & P500 and Nasdaq indices were down 0.6%, 0.3% and 0.7% respectively. At the same time, the Russell 2000 index was down 1.1%. The CAC index in France led with an increase of 0.7%. Most Asian indices also recorded price increases. Due to the sharp rise in the inflation rate, there was a weekly strengthening of 1.1% against the dollar. Since the beginning of the year, the dollar has appreciated by 6.3% against the euro. Brent crude fell 0.9% this week, gold rose 2.8% and silver rose 5.2%, following the inflation figure.
US: Rise in inflation and inflation expectations. The consumer price index rose by 0.9% in October compared to expectations of a 0.6% increase. In the last 12 months, the index has risen by 6.2%, the highest annual rate since November 1990. The sharp rise in the index in the past year has been affected by the recovery of the US economy and the rise in demand but mainly by price increases due to global supply chain disruptions. The energy component of the index has risen by 30% in the last 12 months. Food prices, used cars, rents, and other items also rose higher than forecast. Inflation expectations from the capital market have risen in the past week and reached a level of 3.2% for five years and 2.8% for 10 years. For more than a decade, US inflation expectations have not been at such levels. Ten-year bond yields rose from 1.45% to 1.56% during the week.
USA: University of Michigan Consumer Confidence Decreases. Despite the improvement in the labor market, which marked this week with the drop in new weekly demands for unemployment benefits to 267,000, the low level from the outbreak of the corona, fears of a rise in the inflation environment apparently led to further sharp declines in the University of Michigan consumer confidence index. The consumer confidence index fell in October to a low of 66.8 points, the lowest level since November 2011. The survey authors stressed that many respondents mentioned the rises in prices of apartments, cars and durable goods as factors that hurt their consumer sentiment.
Eurozone: Towards imposing new restrictions on activity? The rise in morbidity from the corona has led to widespread public debate about the possibility of imposing restrictions and partial closures. The Dutch government has reinstated rules that previously existed regarding the wearing of masks, and in Denmark they have re-tested vaccinations before entering closed places. In Italy, they have started a special campaign for a third vaccine for people aged 40 and over. In Germany, about 50,000 new corona cases a week have been reported, and there are fears of a worsening situation ahead of this coming winter. In Hungary, the Czech Republic and Slovakia, too, decision-makers are preparing for new containment measures.
Eurozone: European Commission raises growth estimate this year to 5%. This is compared to the previous estimate of 4.8%. However, forecasters have highlighted the risks of lower growth amid global supply chain disruptions, the spread of the corona and rising commodity prices. The GDP growth forecast for 2022 is 4.3%.
Japan: Annual increase of 8% in the producer price index in October. This is the highest rate of increase in the last four decades. This is due to the effect of bottlenecks in the supply process and an increase in the prices of goods. Most companies have so far refrained from rolling out these price increases to consumers, and the projected inflation rate in the fiscal year of 2021 remains zero according to the central bank. The elected Prime Minister, Fumio Kishida, is preparing budgetary measures to stimulate activity and employment in the economy. The intention is to implement some of the measures in the current fiscal year, and the rest will be implemented in the next fiscal year that will begin in April 2022.
China: The producer price index rose in October by 13.5% compared to October last year, the highest rate in the last 26 years. Recall that this price index rose by 10.7% in September. Equity indices have risen weekly, amid estimates that the government will soon announce relief to real estate companies to ensure they meet their current debt payments. The central bank’s foreign exchange reserves rose to $ 3.2 trillion at the end of October. This is mainly due to the increase in holdings of local government bonds by foreign investors.
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