| By Yonatan Katz and Leader Capital Markets economists
Yields in the US rose sharply towards the end of last week, both against the background of improved consumer confidence and an increase in inflation expectations and also as a result of hawkish statements from several members of the Fed. In Israel, the depreciation of the shekel continued against a background of political uncertainty and fear of capital outflows. This trend, if it continues in the coming week , may support an interest rate increase of 0.5% on 20.2, depending on the January index of course.
| Stable growth but with expectations of moderation
In January, the survey of trends in the business sector indicates continued expansion in activity but growing pessimism regarding the expected change in activity in the next three months. The current situation component is relatively high (25.5 points, in the net balance), but there is a noticeable moderation regarding the expectations for a change in activity for the next three months (net balance of only 2.77):
At the same time, there was an improvement in the expected change in employment component to 5.77 n in January from 3.95 in December. Also in high-tech services (information and communication) there is an improvement in the expectation of a change in employment, after a sharp decrease in December:
The information and communication branch (high tech services) is more pessimistic about the development of exports. Expansion is still expected but at a very moderate pace. The meaning of weakness in exports: a decrease in the current account surplus and a weakening of the forces of appreciation b.
Expectations among the business sector rose slightly to 2.92% (one year ahead) from 2.87% a month ago. It is interesting to see that inflation expectations among the business sector have stabilized at a relatively high level compared to expectations in the capital market:
The intensity of the limitation of the lack of workers in the expansion of activity has decreased, in particular in the trade sector. This means less wage pressure in this industry:
Meanings: This is a current indicator (month of January) and an important source regarding the state of the business sector and future expectations. The current situation component is still relatively high and despite the moderation in expectations going forward (not a decline but a moderation), the Israeli business environment is solid enough to support the
The nervousness in the markets and the increase in uncertainty regarding government policy (and the possibility of an impact on capital movements), if they continue, is an indirect factor that will support an interest rate increase beyond the 4% level.
| USA: Yields have fallen and demand for housing is returning
The requests for taking increased by 7.4% in the last week until February 3rd. The last month shows a recovery in demand for housing:
The drop in yields contributed to the recovery in housing demand. This is an easing of financial conditions in practice and probably not what Powell wants to see. From the Fed’s point of view, this is another reason to continue to raise interest rates (in addition to two 0.25% interest rate hikes), especially against the background of positive indicators regarding the American economy (strong labor market, increase in, and expansion in the service industries).
| Zoom In: A budget deficit of 3.7% of this year’s GDP is expected
The year 2022 was a very blessed year, with a combination of a rapid increase in revenues and a relatively moderate increase in government spending. This combination resulted in NIS 9.8 billion or 0.6% of GDP.
In January, there was a sharp decrease in tax revenues at a real rate of 12% compared to January last year, in particular in income tax revenues (due to the revision of the tax rates), corporate tax and real estate taxes. In total, direct taxes decreased by 16.8% and consumption taxes decreased by 3.9% (real change in uniform tax rates). Of course, this is in comparison to January 2022, which was characterized by a particularly high level of income. From the middle of 2022, there was a change in the trend towards a contraction in revenues:
The expenses of the government ministries increased by 6.8% compared to January last year, a relatively high rate. In this year’s continuation budget, there is really no effective limit of 1/12 of the 2022 budget (which also includes bond redemption). This limit allows spending of NIS 38.4 billion per month for the ministries, in fact in January the spending of the ministries was only 30.1 billion. Simply in the absence of work plans of the ministries (still) the spending from Tibbe tends to be conditional. As we mentioned, this year the expenses rose sharply, in particular in the social ministries with an 11% increase in spending.
The budget surplus in the last 12 months moderated to 0.3% GDP from 0.6% a month ago.
The year 2023 is expected to be problematic in both areas: both an acceleration in spending and a nominal decrease in income.
Between the years 2015-2019, tax revenues increased nominally at a rate of about 5% per year on average. In 2021, revenues jumped by 24% and in 2022 by an additional 14%. This is the effect of the high-tech sector and the boom in real estate. To assume a nominal decrease in tax revenues in 2023 certainly seems reasonable considering the decrease in the activity of high-tech companies, a decrease in capital raising from abroad, and a sharp decrease in activity in the real estate industry. In January, revenues decreased in real terms in -12% compared to January 2022. We assumed a 9% (nominal) drop in 2023 to NIS 395 billion. This is still a collection level 23% higher than the collection in 2019 (on the eve of the Corona virus).
We opened the year with a relatively rapid increase of about 7% in government spending, while the social ministries had an 11% increase, and the Ministry of Defense about 2%. In our analysis we assumed a nominal increase of 9% in the expenditure of the offices this year. The Government Expenditure Limit Law allows a lower growth rate, but it is likely that in light of budgetary requirements, adjustments will be made to the wording of the law. It is important to take into account the salary agreements (it is likely a significant one-time payment in addition to the increase in the base), a desire to fight the cost of living (lowering the excise tax and the tax on soft drinks and disposable utensils, and also the increase in the average inflation of about 4% in the transition from 2022 to 2023 (average year compared to the annual average) which will affect the budget coefficients.
GDP is expected to reach 3.7% this year, which will dictate an increase in government recruitment. The deterioration in the fiscal environment is expected to support a narrowing of the yield gap with the US.
The authors are leading capital markets economists. The review is based on information published to the general public by the companies surveyed in it, as well as on assessments and estimates and other information that Lider & Co. Investment House Ltd. (“Leader & Co.”) assumes is reliable, and this without having performed independent tests in relation to the information. However, it is emphasized that Leader & Co., the authors of the review and its editors are not responsible for the reliability of the information, its completeness, the accuracy of the data contained therein or any omission, error, or other defect therein. This review does not constitute investment advice and does not constitute an invitation to purchase or an invitation to sell the securities mentioned therein. Rely on the information contained therein and it does not replace independent judgment and receiving professional advice, including from an investment advisor whose advice takes into account the data and the special needs of each person. Leader & Co., its employees and officers, the controlling owners and their subsidiaries or affiliates (“Leader Group”) may hold the securities and/or the financial assets described in the review.