| Yaniv Bar, Economist in Leumi’s Economics Division
| The government deficit fell in February to about 2.2% of GDP, thanks to a continued accelerated increase in revenue
The positive trend in the budget data continued in February 2022, during which the government’s activity amounted to a surplus () of about NIS 4 billion, compared with a deficit of about NIS 11 billion in February 2021.
The cumulative surplus from the beginning of the year (January-February) was a record amount of NIS 22.6 billion, which is exceptional compared to previous years. That is, budget performance in the first two months of the year has been particularly positive, and is significantly noticeable relative to the past. This is despite the increase in morbidity in the “omicron” strain of the corona virus during this period.
The sharp increase in state revenues continues to be the main cause of the impressive budget surplus. Revenues in January-February totaled a record amount of more than NIS 80 billion.
This is an increase of about 23.7% (in real terms and at uniform tax rates) compared to the corresponding period last year, when direct tax revenues grew at a faster rate compared to indirect taxes (an increase of 31.7% compared to 12.9%, respectively).
The increase in revenue was relatively horizontal, and included most of the components. However, it is likely that some of the growth will not continue at such a rapid pace later this year, with an emphasis on real estate tax revenues, for which the Ministry of Finance noted that there is a moderation in growth in February compared to previous months.
At the same time, government spending was low relative to the same period in 2021, mainly due to the decline in aid program spending, thanks to the recovery in economic activity.
In summary, the deficit in the last 12 months ended February 2022 decreased to about 2.2% of GDP, compared to a deficit of about 3.2% of GDP in January.
In light of this, and against the background of the expectation of continued growth at a relatively rapid rate of domestic GDP during 2022, at a rate of 5.8% according to Leumi’s latest forecast, it appears that the updated deficit estimated by the Ministry of Finance for 2022, about 3.2% GDP (compared to target An official deficit of 3.9% of GDP) is achievable.
We will also emphasize that the significant improvement in the fiscal profile of the economy at present, increases the flexibility of the government in dealing with the acceleration in the economy and the consequences arising from the war in Russia-Ukraine.
This, with an emphasis on the price of fuel, which is expected to continue to rise in the coming months, and has a significant tax component (excise tax), which the government may reduce for a limited period of time, in order to moderate the increase in the cost of living to some extent.
In addition, it should be noted that the current trend reduces the need to issue bonds to a significant extent for the purpose of financing the deficit.
| Small businesses have been hit harder than the Corona, but are on a recovery trend
The Central Bureau of Statistics (CBS) published the survey of business trends for February 2022. The survey includes, among other things, data on the assessment of membership in the local business sector and the rate of economic activity expanding at present and looking ahead.
As for the current state of the company (current economic situation), the survey findings show that the net balance (the weighted difference between the percentage of company executives who reported an improvement in the situation and the percentage of company executives who reported deterioration) of most industries has stabilized in recent months. The expansion of economic activity at a rate similar to that which was on the eve of the outbreak of the corona crisis.
It should be noted that the trade and industry industries stand out positively, and on the other hand the hotel industry, which has not yet returned to full activity, still stands out in the negative compared to the other industries, despite the recovery recorded in February. We will also note that in most industries, company representatives expect an increase in the rate of expansion of activity in the coming months.
However, an examination of the survey findings by segmentation by size of business (the survey includes companies with at least 5 employees), measured by the number of employees employed in it, indicates variance in the trend. The smaller the business, the more significant the impact on activity with the outbreak of the corona crisis (March 2020).
In small businesses, which employ 5 to 10 workers, the decline in activity was most significant, though, followed by a recovery trend, and at present the level is close to that which was on the eve of the crisis.
On the other hand, businesses employing 250 or more workers reported only a moderate decline in their activity with the outbreak of the crisis, and then were on a recovery trend up to the current level, which is higher compared to the eve of the crisis.
In conclusion, the corona crisis has unevenly affected the business sector in the economy, both at the industry level and in terms of business size. Small businesses, which are more sensitive to macroeconomic shocks, experienced the most significant impact, however thanks to the rapid expansion in activity in 2021, they recovered, but based on their assessment, activity has not yet returned to pre-crisis levels.
Looking ahead, as economic activity continues to expand later in the year, in line with the key scenario, it will support the continued recovery of small business activity.
| Despite the acceleration of world inflation, in Israel it remains among the lowest among OECD countries
OECD data show that the annual inflation rate (rates of change in the consumer price index in the last 12 months) in the countries of the organization rose in January 2022 from 6.6% to 7.2%.
This is the highest rate since the early 1990s, which indicates a step up in the global inflation environment, at the present time, mainly against the background of rising energy and food prices.
In addition, core inflation (the index excluding energy and food) among OECD countries rose in January from 4.7% to 5.1% (annual rate). That is, the pressures for price increases are relatively horizontal and include most sectors of the economy.
It should be emphasized that these figures do not include the effects of the fighting between Russia and Ukraine, which began in late February and has already led to significant price increases, with an emphasis on commodity industries, most notably energy and food. This is because Russia has significant market shares in the markets, natural gas and other commodities, and it is one of the most prominent suppliers in the world, especially to European countries.
Ukraine also has significant market shares in the food commodities (wheat, cereals and), which contributes to the development of pressures and price increases.
Apparently, the military confrontation, which is disrupting production and supply processes, combined with the widespread and diversified economic sanctions imposed on Russia by the West, are factors that are expected to lead to higher inflation than early estimates during 2022, with a focus on European countries.
The current rate of price increase is particularly pronounced in Eastern European countries, as well as in the United States, Chile and Mexico, where high inflation has also been recorded in the eurozone countries, such as Belgium and the Netherlands.
Israel remains at the bottom of the inflation distribution in OECD countries at present, despite global price increases, and similar to the trend in recent years.
A development that is explained, among other things, by the strong shekel, which moderates the rise in import prices, and also due to the relatively low sensitivity of electricity prices in Israel to world energy prices.
Looking ahead, in light of global developments, we have updated Israel’s inflation forecast for 2022, which currently stands at 2.9% -3.9% (during the year).
In light of this, we estimate that the Bank of Israel will raise it at its next meeting (April), and then, in our estimation, two more interest rate hikes are expected during 2022, which is expected to be 0.75% at the end of the year.
Interest rate hikes are expected to continue in 2023, though, at a slower pace, and depend on economic developments in the local and global economy.
The writer is an economist in Leumi’s economics department. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice for the purchase and / or execution of any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.