The growing fear in the world of a slowdown in economic activity will eventually reach Israel as well, albeit with less intensity than in the world. We identify two significant differences between Israel, the United States and Europe: the lack of dependence on world natural gas prices, a factor that moderates inflation in Israel and the damage to the purchasing power of the public, and the second factor is a low budget deficit relative to the United States and Europe. -1.5% of GDP, while in the US and Europe the numbers are around 4% to 5%. The government is low, and there is no process of reducing the balance sheet of the central bank as in the US for example (QT) and this factor also has a positive effect on capital prices in the domestic market.
Signs of damage to private consumption – Credit card purchases fell by 0.4% in March. We estimate that the figure was affected by a sharp increase in the number of passengers abroad, who divert consumption in Israel to consumption abroad (credit card purchases are only local). We estimate that this trend will continue in the coming months, partly due to the effect of price increases that are hurting the purchasing power of the public.
Raising capital in high-tech continued in the first quarter of the year. IVC data indicates high-tech investments of $ 5.6 billion in the first quarter of the year, although a decrease compared to previous quarters, but a very high amount compared to the years to 2021. Raising capital is the fuel of high-tech companies, they enable the continuation of activities, investments and payment of salaries to workers in the industry.
The average unemployment rate in March fell to 3.4%, and the economy can be said to have returned to pre-Corona employment. We estimate that wage pressures in the economy are high, which is one of the main risks that could cause inflation to remain high.
The shekel depreciated in April by 4.4% against the dollar. The devaluation partly reflects the strengthening of the dollar in the world, and against the euro the exchange rate was quite stable. A decline in world stock prices has led institutional investors to buy large amounts of foreign currency in recent months – about $ 3 billion a month in January and February. .
The inflation forecast is expected to rise in light of the devaluation created by the exchange rate, as well as the rise in world oil prices to about $ 110 per barrel. The main update is for the May index, which is expected to rise by 0.6% instead of 0.4%. The annual inflation rate of 2.9%. Inflation at the annual level is expected to cross the 4% level in the coming months. Although the Israeli economy does not have a system of linkages to the consumer price index that existed two decades ago, there are still contracts and agreements that depend on the consumer price index and are expected to become more expensive. The property tax, for example, depends in part on the consumer price index. The prices of the various insurances are often related to the consumer price index. We estimate that in the coming months we will see price increases due to linkage to the consumer price index. In the inflation forecast we give some weight to government policy, which will use tax collection surpluses to moderate price increases in items such as transport, education and food.
The market embodies interest rate increases to a level of about 2% in about a year, which means an increase of 0.25% in almost every decision. In the US, the market embodies faster interest rate hikes to 3% in a year. This gap seems reasonable to us in light of the inflation differences between the countries, and a better budgetary situation in Israel than in the US. The effect of the interest rate on inflation in the consumer price index is very slow, and at the starting point the real interest rates are negative. It is estimated that central banks will strive to reach positive real interest rates in the short term, and assuming that inflation expectations do not fall so quickly from 2%, it is likely that interest rates will continue to rise above 2% next year.