| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
| Exports of services continue to support the shekel
Israel’s services continue to move up with an increase of 8 percent in October (according to seasonally adjusted data) and 40 percent compared to October last year. The sharp increase in investments in the high-tech industry in 2021 will lead in our estimation to the continued expansion of exports in the coming years as well.
This supports the expansion of the surplus in the services account and the strength of the shekel.
In 2021, the shekel was among the strongest currencies in the world with an appreciation of about 8 percent against the basket of currencies (3% against and 11% against). The surplus in the current account of the balance of payments, leading to exports of high-tech services, along with increases in world stock markets, contributed to this, despite a record high of over $ 35 billion in foreign exchange purchases by the Bank of Israel.
We still expect the appreciation to continue this year, but we estimate that volatility in the foreign exchange market will increase in light of the completion of the acquisition program and an expected decrease in the Bank of Israel’s intervention. To strengthen the shekel.
| Relatively low inflation, along with the strength of the shekel, will allow the Bank of Israel a wide margin of maneuver.
We expect the country will not rise at least until the last quarter of 2022 even when we see an increase in the US.
As expected, the Bank of Israel left the interest rate and noted that monetary policy is expected to remain extended for a long time in light of the challenges that still exist for economic activity, including the state of morbidity.
An initial manifestation of the effect of the current wave of illness can be found in December, when there was a decrease in the total number of credit card purchases, especially in the tourism and restaurant industries.
The December Labor Force Survey showed a slight increase in the broad definition to 6.3 percent (6.1 percent in the second half of November), but the situation is still much better compared to the end of the third closure when the labor force percentage returned to pre-crisis levels in November.
The completion of the acquisition program will contribute to an increase in volatility, and strengthens our assessment that we will continue to see an increase in bond yields, which will also be affected by a parallel increase in the world in light of the continued process of raising interest rates in many central banks.
Unlike other central banks in the world, we believe that we will not see an increase in interest rates in Israel before the last quarter of 2022, due to the relatively low level in Israel compared to most OECD countries, as the Governor of the Bank of Israel emphasized in his speech.
This is also reflected in the updated forecasts of the Bank’s Research Division, which expects inflation to be 1.6 percent by the end of 2022 and 2 percent by the end of 2023.
At the same time, the Bank slightly downgraded its growth estimate for 2021 to 6.5 percent (7% in the previous forecast), but left the forecast for 2022 unchanged at 5.5 percent (still higher than our estimate to 4.8%).
The Bank first published a growth forecast of 5 percent in 2020 (here, too, the forecast is higher than our estimate of 4%).
| In China – a moderation in price pressures and better-than-expected data
China surprised positively when it rose more than expected to 50.9 points in December. Improvement in demand along with continued easing of disruptions and bottlenecks have contributed to this, a figure that indicates that in the meantime the industry is dealing with corona outbreaks in various parts of the country.
At the same time, the price pressures are also moderating in light of the government’s actions to improve supply and lower the prices of raw materials, which for the first time in about a year and a half has allowed companies to reduce prices slightly.
The big question is whether this positive trend will continue when the omicron reaches the shores of China. On Thursday, the Purchasing Managers’ Index for the Services Industries will show whether the expansionary monetary policy has contributed to the improvement in sentiment in light of concerns from the Omicron and continued closures.
| After the holidays (abroad) the data return
In the last two weeks, the economic publications from abroad have been sparse in light of the Christmas / Rosh Hashanah holiday. In the United States, the last one will be published on Wednesday and the last one for Friday, 2021.
Preliminary indicators point to a continued improvement in the labor market (still ahead of the Omicron), which supports US Federal Reserve interest rate hikes this year and continued yields to rise.
In the euro area, indices will be published on Thursday and the estimate for inflation on Friday. The numbers will continue to show that in Europe the “price power” of companies is particularly low compared to the US and they are having a hard time rolling down the costs on consumers.
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.