| Victor Behar, director of the economic department at Bank Hapoalim, and Hapoalim economists
| Israel:
Growth is cooling – growth in the second quarter slowed to an annual rate of 2.1%, which is a 0.2% decrease in GDP per capita.
Investment in construction, both for residences and other construction works, has grown in the last two years at a rapid pace, and in the last quarter by 10.1% in annual terms. On the other hand, the expenditure for private consumption decreased in the last quarter at an annual rate of 1.7%, this is mainly due to a decrease in the consumption of sustainable products. We expect this trend to continue in the coming quarters, meaning that the large backlog of investments will have a positive effect on growth, while private consumption will continue to moderate under the influence of the deterioration in the purchasing power of households and the increase in interest rates. In the fourth quarter, it will also be lower than the increase in the population.
It rose in October to a level of 4.1%, seasonally adjusted, and the number of vacancies decreased in October by three thousand people. The demand for high-tech workers decreased by 31% compared to February of this year. The scope of vacant positions is still high and stands at 147 thousand people. A high rate of vacancies is supposed to moderate the increase in unemployment, but it seems that there is a mismatch between the jobs, the supply of workers, or the skills or salary expectations, so it is not impossible that we will see the unemployment rate rise, while there is still an active demand for workers.
It rose in October by 0.6%, completing a 5.1% increase in the past year. In our estimation, the increase in the index reflects, among other things, a reaction to developments whose impact has accumulated over months and are now being reflected in the index. The food section is an example of this: price increases have slowed down under public pressure, but as costs accumulate, including wage costs, producers eventually raise prices. In the housing section, the story is a little different, the prices tend to be updated when tenants change, so the measurement of the increase in price is smoothed by the measurement over time.
The inflation forecast for the next 12 months dropped to 2.6%. The forecast for the coming year is significantly influenced by assumptions regarding government policy. We assume that the composition of the government and the election promises will lead to a discount on some consumer products such as disposable dishes and sweet drinks. We also assume that the excise tax on fuel will be extended in the coming year, and that electricity and water prices will not be increased.
These measures have a budgetary cost, and are therefore expected to increase the budget deficit next year. The effect of these measures on inflation is one-time and over time the increase in the deficit may increase inflation. The slowdown in economic activity and the damage to purchasing power are expected to moderate the increase in rental prices in a few months (price increases will still be high in the coming months).
Two figures published in the past week support the process of front-loading, meaning a high interest rate increase aimed at adjusting the interest level to the inflation environment. rose to the level of 5.1%, although not a big surprise, but a figure that was on the high side of the forecasts. The growth of the economy in the third quarter stood at 2.1%, a figure that is significantly lower than the growth potential, but still high compared to the early estimates based on the monthly data.
The monetary committee will also examine the future expectations of inflation, interest rates in the world and economic activity. Here the picture is already less clear – inflation expectations for one year are within the target (2.6%), the rate of interest rate increases in the US is expected to slow and the unemployment rate in Israel has begun to rise to 4.1%. In light of these data, we give greater weight to an interest rate increase of 50 Basis points to the level of 3.25%. The inflation environment in the world supports a high level of interest over time and this, in our estimation, is of greater significance than the rate of interest rate increases at this stage. It can be seen that the markets have now moved to embody a situation where it is stalled at a level of 3.75% (compared to 4% and more about two weeks ago) , but remained at this level for a long time.
| global:
After the euphoria that prevailed in the markets after the publication of the price index for the month of October, the markets are returning to the ground of reality: the gap between inflation of 7.7% and price stability is large, and even if the Fed interest rate is curbed around a level of 5%, it will probably remain at a high level for an extended period. In the meantime, the signs of recession are multiplying, companies are becoming more efficient and reducing their workforce, and it seems that it is only a matter of time before unemployment rates will also rise. The recession should curb inflation, but there is no telling how long it will take.
A mixed trend in the world’s stock markets in the last week. In the US, investors closely followed the quarterly reports of companies in the retail sector. The share price of Target (NYSE:) fell after the company reported a decrease in sales in recent weeks. On the other hand, better than expected results at companies such as Walmart (NYSE:) presented a relatively encouraging picture.
The “bearish” statement of the head of the Fed in St. Louis, Bullard, led to declines in stock indices towards the end of the week. In the weekly summary the and index decreased by 0.7% and 1.6% respectively and the index remained unchanged.
The index in Europe rose by 1.5% and the stock indices in Hong Kong and Taiwan recorded increases of about 3.8% on average. Indices in South Korea, Japan and India recorded declines. In the commodity market, the overall index decreased by 2.9% led by energy prices which decreased by 6.4%.
The price of a barrel of oil fell by a sharp rate of about 8.0% to the level of 87 dollars per barrel.
| USA: General activity is slowing, but for now the unemployment rate is relatively stable
New data released last week indicated a higher than expected increase in (nominal, excluding cars) at a rate of 1.3% in October. In the last 12 months, retail sales increased by 8.3% in nominal terms, but in real terms there is a stagnation in sales and they increased by only 0.5% during this period. There was an unexpected drop in industrial production in October, and the level of industrial activity in the Mid-Atlantic region was the lowest since May 2020.
The output price index (core) remained stable in October and the annual rate moderated to 6.7% from 7.2% the previous month. In the labor market, the new weekly claims for remained relatively stable, at a level of about 220 thousand applications, a level that characterizes the data from the end of September. However, the headlines about layoffs in the high-tech industry continue, and this week Amazon announced its intention to cut ten thousand jobs. The index of leading indicators fell by 0.8% in October, above the forecast. This index has not risen since February of this year, and the decrease in consumer expectations regarding their situation in the future was the main factor behind the decline of this index.
In the US housing market, the decline in activity continues. The NAHB index for contractor confidence continued to decline this month as well, and is close to the level recorded at the height of the Corona crisis and before that in 2012. Sales fell by 5.9% in October to the lowest level since December 2011. A decrease in sales, against the backdrop of high housing prices and mortgage interest rates that rose to the highest level in twenty years. The 15-year fixed interest rate reached 6.5% at the end of October, but has since moderated slightly to 6.2%. Construction starts also continued to decline in October at a rate of 4.2%, a decrease of about 20% from the peak in April, and returned to their level at the end of 2019. Construction permits have also decreased in recent months.
A statement by Fed member James Bullard led to a drop in stock indices and bond yields. Although at the beginning of the week, Fed member Waller stated that it would probably be possible to settle for 0.50% in December, but during the week another member of the Fed, Bullard, emphasized the difficulty in curbing inflation and The need to continue raising interest rates, at least until it reaches a level of 5-5.25%. In addition, he declared that if necessary, the interest rate could even reach 7% per year. This statement led, among other things, to an increase in short-term yields. The yield to maturity on Ag H. The US government rose to 4.53% from a rate of 4.32% a week earlier. At the same time, the ten-year yield remained stable at 3.83%, and the result was the formation of the sharpest negative slope in the yield curve in the last forty years.
| The Eurozone: wage struggles will decide where inflation will go
The largest trade union in Germany, IG Metall, agreed to curb the increase in wage payments to a lower rate than According to the agreement, the salary will increase by 5.3% from June 2023 and by 3.3% from May 2024. Also, a one-time payment of 1,500 euros will be paid in each of the above two years. Originally, the trade union demanded an 8% wage increase next year. The wage agreement will apply to 3.9 million workers in the metal and electricity sectors. The annual inflation rate reached 10.6% in October and core inflation reached 5.0%. If we ignore the one-time compensation, then the real wage will erode considerably, at the same time, a wage increase of 5.3% is still high in relation to the improvement in labor productivity, and in the short term it works to increase inflation.
| England: The annual inflation rate reached 11.1% in October, the highest rate in the last 41 years.
The main items that contributed to the increase were energy and food. At the same time, the unemployment rate remains low at around 3.6% despite the significant slowdown in activity. The Minister of Finance announced restraining fiscal measures aimed at improving the situation and credibility in the areas of the state budget. The government is planning tax increases and a gradual reduction in spending. The bulk of the spending restraint is planned to be implemented after the 2024 general election.
| China: a sharp drop of 8% in annual terms in October retail sales due to the closures and the crisis in the real estate industry
Despite the increase in the number of corona patients, the Ministry of Health decided to continue with the more moderate closure policy than in the past. The central bank last week injected liquidity into the commercial banks in order to curb the rise in interest rates on bonds in the market. In the political sphere, the meeting between Presidents Biden and Xi was received positively among investors, who fear the worsening of the cold war between the US and China.
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