| Ofer Klein, head of the economics and research department at Harel Insurance and Finance
| In Israel: inflation is over 5 percent
The interest rate hikes in the world and the tight labor market strengthen our assessment that in two weeks the Bank of Israel will also raise the rate by another half percentage point to 3.75 percent.
For the month of November it increased by 0.1 percent and inflation in the last 12 months rose 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.
Looking ahead, our initial forecast is for a 0.4-0.3 percent increase 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 increase).
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.
Despite the jump in mortgage interest rates and the significant slowdown in the number of transactions, the housing price index continued to rise by 1.2 percent (between mid-September and mid-October) and by 20 percent in the last 12 months. However, the actual activity in the residential housing market continues to moderate rapidly, especially compared to the activity in the previous two years.
Looking ahead, in our estimation, the high prices alongside the process of raising interest rates which translates into mortgage interest rates and the slowdown in growth will continue to moderate the demand for real estate in the short term.
According to the preliminary data for November the labor market is less tight compared to the previous months but still strong. The overall decreased slightly to 3.9 percent (according to seasonally adjusted data) with a slight decrease in the participation rate.
The index (which was close to expectations) does not change our forecast that in about two weeks (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 a signal from the governor that the interest rate increase process is not over yet. This assessment is also supported by the strong labor market and the reasoning of the central banks that we saw last week with notable interest rate increases of half a percentage point by the central banks in the USA (45%-4.25%), in the Eurozone (2.0%), in the UK (3.5%) and in Switzerland (1.0%).
| Globally: 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.
The central bank in the US raised the rate at a more moderate rate of “only” half a percentage point but signaled that the process is not over yet. According to the updated forecasts, most of the bank’s committee members expect the short-term interest rate to be around 5.1 percent at the end of 2023, higher than the level priced in the Hague markets “H.
The governor noted that the recent declines in price indices are encouraging, but still tight and inflation is very high (7.1%) and they do not expect it to return to its target during 2023. Therefore, they need to continue to raise the interest rate and keep it at a high level for an extended period of time in order to moderate demand. A scenario that is similar to our annual forecast.
In November it was lower than expected (second month in a row) and fell to 7.1 percent. With notable decreases in the energy, used vehicles (fifth month in a row), flights and health. The core index (excluding food and energy) also rose less than expected and inflation fell to 6.0 percent. Service inflation, with an emphasis on rent, still shows no significant signs of a decline, only a slowdown.
The rapid increase in interest rates 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 figure for November which surprised downwards with a decrease of 0.6 percent (without gas station sales ).
| Unlike Israel, in Europe winter came and with it the recession
The central bank believes that the recession will be short and inflation will not return to its target in the next two years, and therefore the rising process will continue.
In the Eurozone there are more signs of a slowdown when in October there was a decrease in industrial production and the sentiment of the companies indicates a contraction in activity for the fourth month in a row. Thus, the initial 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).
| In Britain, inflation is beyond the peak, and the interest rate has risen by half a percent, but the members of the bank are divided about what to do next
In Britain, like most of the world, it began to moderate in light of the drop in energy prices and commodity inflation and stood at 10.7 percent in November. It is still very high and therefore, as expected, most members of the central bank chose to raise it by half a percentage point to 3.5 percent, the highest level since 2009.
The members of the committee are still divided about the continuation with some voting in favor of a higher increase in light of the high (6.3%) and tight core inflation. But other members supported a more moderate increase in light of the fears of entering a recession as reflected in the latest data such as the Purchasing Managers’ Index, the decline in retail sales and apartment prices.
| The latest data from China explains why the authorities have recently begun to lift some of the corona restrictions
The real data for November in China continue to be weak, and after the weakness in the foreign trade data, they were also disappointing with a decrease of about 6 percent in November (compared to the corresponding period last year).
This partly explains the reason for the rapid reduction of the restrictions that we have seen in the last two weeks, a trend that we estimate will continue. But at the same time, the (relatively) low vaccination rate in China will make it difficult for private consumption to recover quickly as we have seen in Western countries with the “reopening” effect.
| In Japan, the land of the rising sun – not only the sun rises
This morning the Japanese central bank announced that it will update the policy of maintaining the curve and will allow the yield to rise up to 0.5 percent (0.25% in the previous target). This caused a sharp increase in government bond yields and a strengthening of wine. Despite our expectation of a withdrawal from this policy, the markets have given low chances that it will materialize before the current governor (Kuroda) ends his term at the end of the first quarter of 2023.
The announcement opens the door to a hike by the central bank of Japan during the next year and reinforces our expectations for continued strengthening of the Japanese currency.
The writer is the head of the economics and research department at Harel Insurance and Finance. The author(s) and/or companies in the Harel Group and/or those interested in them and/or those controlling the group, may own and/or trade, for themselves and/or for others, the securities and financial assets indicated in this review. This review should not be seen as investment marketing or a substitute for investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the writer’s opinion at the time of publication, and this can change at any time and without further notice. The company will not be responsible, in any way, for damage and/or loss that will be caused, if caused, as a result of relying on this review, and also does not guarantee that relying on the information that appears in it may yield profits.