Ofer Klein (photo by Yonatan Blum, Flash 90/ Yossi Aloni)
Ofer Klein, Head of the Economics and Research Department at Harel Insurance and Finance, published his weekly review of the economic situation in Israel and the world. This is the face of things:
Inflation above 5 percent, interest rate increases around the world and the tight labor market strengthen our assessment that in two weeks the Bank of Israel will also raise the interest rate by another half percentage point to 3.75 percent. In addition, we expect a signal from the governor that the interest rate increase process is not over yet (or will he choose to remain silent?).
According to the preliminary data for November, the labor market is less tight compared to the previous months but still strong. The general unemployment rate fell slightly to 3.9 percent (according to seasonally adjusted data) with a slight decrease in the participation rate. The consumer price index (which was close to expectations) does not change our forecast that in about two weeks (on January 2) we will see another increase of half a percentage point in the Bank of Israel interest rate which will reach 3.75 percent. In addition, we expect to see a signal from the governor that the interest rate hike process is not over yet. This assessment is also supported by the continued interest rate hikes around the world.
The consumer price index for the month of November increased by 0.1 percent and inflation in the last 12 months increased to 5.3 percent (the highest since October 2008), increases in the food and housing items (which surprised significantly above) were offset by a decrease in the prices of fruits, vegetables and travel abroad. At a glance Going forward, our initial forecast is for an increase of 0.4-0.3 percent in the December index with a seasonal increase in clothing prices alongside an increase in fuel prices, and a similar increase in January when a seasonal decrease in clothing prices will be offset by an increase in food prices and a high increase in electricity and water prices (in case the elected government does not stop or moderate the ascension).
The construction input index decreased by 0.2 (first decrease since October 2020). As we mentioned in the previous two months, among the factors for this, the slowdown in global growth (with an emphasis on China) stands out, which contributed to the drop in the prices of raw materials for industry alongside the drop in global shipping prices. Looking ahead, we will mention the planned update of the index at the beginning of 2023 (which has not been updated for almost a decade), which could lead to a significant change in the calculation and forecast going forward.
More in-
in the world
In Japan, the land of the rising sun – not only the sun rises. The announcement opens the door to an interest rate increase by the Central Bank of Japan during the next year and reinforces our expectations for continued strengthening of the Japanese currency. This morning the Japanese central bank announced that it will update the policy of maintaining the curve and will allow the 10-year yield to rise up to 0.5 percent (0.25% in the previous target). This caused a sharp increase in government bond yields and the strengthening of wine. Despite our expectation of a withdrawal from this policy (see review inflation and Japan in the same sentence?), the markets have given low chances that this will materialize before the current governor (Kuroda) ends his term at the end of the first quarter of 2023. The message Opens the door for an interest rate increase by the Central Bank of Japan during the next year and reinforces our expectations for continued strengthening of the Japanese currency.
Commodity inflation in the US is moderating, but it only accounts for about a third of the index. The high interest rate will stop growth next year, initial buds for a slowdown in private consumption. Inflation in November was lower than expected (second month in a row) and fell to 7.1 percent. With notable declines in the energy sectors, Used vehicles (fifth month in a row), flights and health. The core index (excluding food and energy products) also rose less than expected and core inflation fell to 6.0 percent. Service inflation, with an emphasis on rent, still shows no significant signs of decline – only a slowdown. The fast interest rate in the US and around the world is the main reason why we (and the world) expect a slowdown in growth in 2023. The first figure for this (outside the real estate sector) can be seen in the retail sales figure for November, which surprised downwards with a decrease of 0.6 percent (without gas station sales).
The central bank in the US raised the interest rate at a more moderate rate of “only” half a percentage point but signaled that the process is not over yet. More on this, and on the Fed’s updated forecasts in the attached review. Unlike Israel, in Europe winter has arrived and with it signs of recession. But the central bank Believes that the recession will be short and easy – we think otherwise.
In the Eurozone there are more signs of a slowdown when in October there was a decrease in retail sales and industrial production and the sentiment of the companies indicates a contraction in activity for the fourth month in a row. Thus, the initial Purchasing Managers’ Index for December (released early because of the Christmas holiday in Europe) rose to 48.8 points, better than expected but still indicating a contraction in activity.
The Central Bank of the Eurozone also raised the interest rate “only” by half a percentage point to 2.0 percent (the interest rate on deposits), but the governor stressed that the process of raising interest rates will continue. In the updated forecasts, the bank does not expect that inflation will return to the target (2%) in the next two years and that there will be only a slight recession. In our estimation, the growth forecast for the bloc (0.5% in 2023) is too optimistic, which will make it difficult for the central bank to continue with the interest rate increase beyond 3 percent during the next year. In addition, the bank will begin a gradual reduction of the balance sheet in March 2023 at a rate of 15 billion euros per month (in February it will publish how it will do this).
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