| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
The daily volatility in commodity prices continues to be high, so for example the price recorded last week decreased by 8% and the price of barrel for delivery in May fell from $ 124 to $ 112.
The damage to the Israeli economy is indirect, trade relations with these countries are limited. The rise in and less expansionary monetary policy will work to slow the economy’s rapid growth in the second quarter of the year.
The rise in energy prices has a relatively small direct effect on the Israeli economy. If we look at the ratio of energy to GDP (an index of energy use petitions out of the total product produced), it can be seen that between 1995 and 2020, energy use petitions decreased by 38%. Part of the explanation stems from a sharp rise in the output of technology industries whose energy consumption is small.
Similar to the global trend, the consumer confidence index in Israel is also declining, against the background of declining exchange rates in the financial markets and rising inflation. The economic indicators published by the CBS indicate a certain moderation in private consumption.
In the months of November 2021-January 2022, sales of credit cards increased at an annual rate of 1.8% compared to an annual increase of 6.3% in the months of August-November 2021.
In the coming months, we are expected to see an increased departure of Israelis abroad, after two years in which travel abroad was low due to the fear of Corona. The departure of Israelis abroad is expected to reduce local consumption.
Continued to decline in February and in the last 12 months it amounted to only 2.2% of GDP. Tax revenues continued to grow at a rapid pace – 34% compared to last year (January-February).
The sharp increase in revenue is due to both the rapid growth of the economy and the price increases in the real estate market, import prices and capital markets. The low deficit allows the government to use the budget to moderate price increases, for example by reducing indirect taxes on food prices.
A surplus of $ 6.6 billion in the current account of the balance of payments in the fourth quarter of 2021. The surplus for the entire year amounted to $ 22.5 billion, similar to the year before. Foreign direct investment in Israel has reached almost $ 30 billion. We estimate that in 2022 the surplus in the current account will decrease due to the rise in world commodity prices as well as increased emigration of Israelis abroad (exports of services).
Direct investment in Israel is also expected to decline due to declining technology stock prices. These amounts are expected to be offset with the cessation of the Bank of Israel. In any case, this year’s appreciation pressures are lower than those of the last two years, but still exist.
Inflation – Many variables enter the picture here: commodity prices, finance policy, immigration to Israel, which is expected to increase in the coming months, and more. The overall picture is much more inflationary than we estimated a month ago for example.
If we freeze energy and commodity prices at their current level, we expect very high price indices in the coming months: 0.5% for the February index, 0.7% for March, 0.9% for April and 0.5% for May. In the next 12 months, inflation will amount to 3.3%.
An early end to the war will lead to lower inflation. The Treasury may choose to mitigate the effect of some of the price increases, for example by temporarily reducing the excise tax on fuel.
If immigration to the country increases, we may also see increasing pressure on rental prices, a factor that may further raise inflation. The bond market is now pricing inflation at an average annual rate of 3.9% over the next two years, however in the derivatives market inflation is significantly lower and is just over 3% per year.
The increase in inflation is largely due to exogenous factors, but there is also a marked increase in local factors such as rents and other services, and in light of the low rate there is a risk that it will be based at a level higher than the target.
We estimate that in the coming months we will see a first rise in interest rates, and two more interest rate hikes by the end of the year. The interest rate in Israel is still expected to be lower than in the United States at any point in the coming year.
| global
The continuation of the war in Ukraine, volatility around a high level of energy prices, the intensification of sanctions against Russia and a rise in the inflation environment were behind the negative performance of US stock indices last week.
The ballet index decreased weekly by 3.5% and completed a decrease of about 20% from the peak level recorded in November 2021. The Dow Jones and the other indices decreased by about 2% and 3%, respectively. As in recent weeks, energy companies have stood out positively.
European stock indices, which stood out negatively in the declines recorded since the beginning of the year, actually rose in the last week. The Eurostox 50 and 600 indices rose by 3.7% and 2.2%, respectively. In Asia, most of the stock indices fell by 3%, except for the index, which fell by 6.2% of its value (following the tightening of Chinese government regulation on companies traded in Hong Kong) and the stock index in India, which actually rose by 2.3%.
High volatility while moderating world commodity prices. The price of a barrel of Brent oil, which before the war in Ukraine was about $ 95, has risen over the past week, albeit temporarily, to about $ 140 a barrel, mainly against the background of US President Biden’s decision to boycott oil imports And gas from Russia, and expectations for a similar step by European leaders.
Towards the end of the week, the price dropped to $ 112 a barrel, apparently due to expectations of an increase in oil supply by OPEC member states (such as the United Arab Emirates) and due to expectations of progress in the negotiations to end the fighting. Despite the high level of the price of oil today, it is important to note that in real terms the price of a barrel of oil in the years 2007-2014 was at a higher level over time.
The price index of all goods recorded a weekly decline of about 5%, led by the energy price index, which fell by 6.4%. The price of wheat in the US also fell this week, by 18%, amid “encouraging” news about an existing large inventory of goods, which could meet demand in the coming months.
In addition to banning energy imports from Russia, the U.S. president has called for Russia to be removed from the list of “trade-favored countries,” a move that would allow the U.S. and other countries to impose tariffs on imports from Russia. In another move, Biden decided to restrict the import of alcoholic beverages, seafood, and diamonds from Russia.
Among the G7 countries, it has been decided not to allow transfers of funds to Russia by the International Monetary Fund and the World Bank. In addition, the process of the departure of well-known multinational companies from the territory of Russia could be seen in the last week.
| US: Continued rise in the inflation environment
The consumer price index rose as expected by 0.8% in February, and by 7.9% in the last 12 months, the highest rate in the last 40 years. Inflation has risen by 6.4% in the last 12 months. Wages in the US have risen 5.1% in the last 12 months, meaning real wages have eroded, but it is still a wage increase that will make it difficult for the US Fed to reduce inflation.
According to inflation forecasts for the coming months, the annual inflation rate in March and April will continue to rise and is even expected to approach a level of 10%. Meanwhile, year-ahead inflation expectations according to the University of Michigan Consumer Survey have risen to a high of 5.4%, the highest rate since 1981.
Inflation expectations derived from the capital market also recorded increases in the past week. Five-year expectations rose from 3.19% to 3.52%, and ten-year expectations rose from 2.67% to 2.94%.
Central banks will try to keep pace. A number of central banks, the main one being the US Fed, are expected to raise interest rates this week.
The bond market is priced with a probability of over 50% that in one of the following decisions after March, an interest rate increase of 0.5% is possible. Accordingly, this week there was an increase in yields to maturity on US government bonds. 1.75% and the yield rose from 1.69% to 2%.
| Europe: EU and UK tighten sanctions on Russia
Between the measures, the access of factors in Russia to the capital market and the financial markets has been reduced. Additional banks were cut off from the money transfer system. The EU has severely restricted airspace to Russia, freezing President Putin and his foreign minister’s assets in European banks.
Similar to the US, the UK has announced a halt to oil and gas imports from Russia towards the end of the year. However, the EU plans to reduce gas imports from Russia by about two-thirds over the next year.
Against the background of rising inflation expectations, the Central Bank of the Eurozone has decided to bring forward the termination of the bond purchase program from the last quarter to the third quarter of this year.
The authors of the review are Bank Hapoalim economists. The review is based on data and information that were visible to the public. The data and information used to prepare it were assumed to be correct, without Bank Hapoalim Ltd. conducting independent tests in relation to the data and information. This review does not verify or confirm their correctness. This review is for informational purposes only, and does not purport to be a full analysis of all facts and all circumstances surrounding it. The information on which the review is based and opinions may change from time to time, without any further notice or publication. Of any investor. This article should not be construed as investment advice or a substitute for investment advice that takes into account the data, needs and special investment goals of each person, and should not be acted upon unless Independent opinion.