| Victor Behar, director of the economic department at Bank Hapoalim, and Hapoalim economists
| Israel: two days to the general elections
We see that the economic issues become more central from one election to the next, probably from the internalization that this is where the votes of the young people are. Unlike most countries in the world at this time, Israel has extensive degrees of freedom in the fiscal field, because it is generally in surplus, and the government debt has decreased sharply in the last year, to a level approaching that of before the corona virus.
A combination of tight fiscal rules and transitional governments have created budget surpluses, which may not be optimal in a time of slowdown. Any government that is formed after the elections will have to decide whether to increase the deficit and stop the decrease in debt, and if so, where to direct the money.
| Growth in the third quarter slowed
This is evident from the economic indicators published so far. Revenue in the marketing chains indicated a downward trend in the months of July-August and credit card purchases increased in the third quarter at a moderate rate of 3%. Private consumption generally grows at a slower rate than credit card purchases, so we estimate that the moderation in consumption is significant. Foreign trade data also indicate a considerable moderation: industrial exports decreased in the third quarter by 5.7%. The import of all its components also decreased in the third quarter.
We estimate that the low growth will also characterize the coming quarters, as part of a process of adjustment of consumption to the decrease in purchasing power, reductions in the large technology companies, and a sharp decrease in the capital raising of high-tech companies.
rose in September according to seasonally adjusted data to a level of 3.7%, compared to 3.5% the previous month. The total number of vacancies in the economy increased slightly in September to 152.3 thousand people, but looking a little longer the figure seems to be stable. A slowdown in economic activity can manifest itself in an increase in the unemployment rate and/or a decrease in the number of vacancies, and the answer to this question lies in the reason for the large volume of vacancies – do they represent a mismatch between the available workforce and the requirements, or alternatively a gap in salary requirements for example.
A slowdown in activity may bridge gaps in wage expectations, but less so a mismatch. This question has implications for inflationary pressures: if the slowdown curbs wage increases, inflation will probably converge relatively quickly to the center of the target. If the lack of working hands is structural, and less related to the business cycle, this may delay the return of inflation to the target center.
The governor of the Bank of Israel estimated this week that the increase in the interest rate to the level of about 3.5% will be accelerated – we expect that in the upcoming decision in November the interest rate will rise by 50 basis points to 3.25%, and then there will be one or two more increases in doses of 25 basis points. The derivatives market now embodies a similar assessment. In our estimation, inflation expectations are expected to decrease during the first quarter of 2023 due to the slowdown in the economy, and this will allow the Bank of Israel to stop interest rate increases.
| Growth figures in the US and Europe were reasonable, but not enough to allay fears of a recession.
The big tech companies, Amazon (NASDAQ:), Meta and Alphabet shed more than 300 billion dollars in value in one week, mainly in light of more pessimistic estimates for future revenues. The efficiency of the companies is now inevitable, and it will in turn exact a price in terms of growth. The real estate industry in the world continues to cool down, the decline in transactions continues and the price declines are expanding. The high inflation obliges the central banks to add and raise interest rates, and most estimates that this process will continue and reach its peak in the first quarter of 2023.
Against the backdrop of declines in companies such as Apple, Amazon, Microsoft (NASDAQ:), Alphabet (NASDAQ:) and Meta (Facebook (NASDAQ:)), which published disappointing quarterly reports as well as pessimistic forecasts about the future, the gap between the performance of the Dow Jones index and the The Nasdaq.
In a weekly summary, the Dow Jones index rose by 5.7%, the S&P 500 rose by 4% and the Nasdaq rose by 2.2%. The differences stood out in the October summary, when the Dow Jones rose by 14% while the Nasdaq “K” increased by only 5.0%.
In Europe, the Eurostox index rose by 3.9% this week. In Asia, the indices in Hong Kong and China recorded weekly declines of 8.3% and 4.6% respectively. On the other hand, the stock indices in South Korea and India rose 2.5% and 1.2% respectively. In the commodity markets, the 3.5% increase in energy prices stood out, including a 4% increase in the price of a barrel of Brent oil to $96.
| The US economy resumed growth in the third quarter, but leading indicators point to a slowdown later.
After two quarters of contraction, the US economy grew in the third quarter at an annual rate of 2.6%, a rate slightly higher than the forecast of 2.4%, and the GDP level returned to that registered at the end of 2021. The increase in activity was supported by vigorous activity on the part of private consumption, which increased by 1.4%, real investments of the business sector and government spending.
On the other hand, there is a sharp decrease in residential real estate investments, due, among other things, to the effect of the increase in the interest rate environment. The Conference Board’s consumer confidence index fell again in October after rising in the last two months. The decrease was recorded in both the current situation index and the expectations index. The University of Michigan index remained approximately unchanged Change, at a very low level compared to the past. The purchasing managers’ index of the industrial sectors (by the PMI company) moved to indicate a contraction in activity for the first time since June 2020. A similar picture was obtained from the index for the service industries as well as the index for total output.
The Conference Board’s consumer confidence index fell in October, for the first time in three months, from 107.8 to 102.5. increased in September by 0.4% and private spending increased by 0.6%. Real private spending increased by 0.3% and the rate of private savings from disposable income remained low at 3.1%. Despite the increase in interest rates and prices, private spending continues to grow, among other things due to a decrease in the rate of private savings and an increase in consumer credit.
| The real estate market in the US continues to cool, the drop in prices intensifies.
In September, there was a decrease of about 11% in the sales of new houses, after a sharp increase recorded in August. The level of transactions is now lower by about 18% compared to September last year, similar to their level before the corona crisis. Contracts for the purchase of apartments also recorded a sharp drop of about 10% in September, and they completed a drop of 40% in the last 12 months. An index for house prices in the 20 largest cities in the US fell by 1.3% in August following a 0.7% drop in July. In cities like San Francisco, Seattle and Los Angeles, the cumulative drop in prices in recent months is sharper and has been going on for three months.
| The inflation environment according to the PCE index remained unchanged in September at a high level, and the Fed is expected to raise interest rates by 0.75%.
The price index increased by 0.3% in September, similar to its increase in August. In the 12 months, the PCE index increased by 6.2% (remaining unchanged) and the core index increased from 4.9% to 5.1%. The inflation data, together with the growth data for the third quarter, support further sharp interest rate hikes by the Fed, and most estimates are that the Fed will raise the interest rate in a decision this Wednesday by 0.75% to a level of 4.0%.
However, some investors drew “encouragement” last week from the surprising decision of the Central Bank of Canada to raise interest rates by 0.5%, contrary to forecasts that expected a 0.75% increase. During the past week, there was a decrease in yields to maturity on two-year and ten-year US government bonds, to rates of 4.41% and 4.02% respectively.
| Eurozone: Despite the risks of recession, the central bank raised the interest rate by 0.75%.
The European Central Bank in four months raised the interest rate on deposits to 1.5%. Today’s level of interest is the highest since 2009. In the Central Bank’s announcement, it was emphasized that the risks of a slowdown in activity are getting stronger and this will also be taken into account in the upcoming decisions.
The growth figures for the third quarter published in Germany and France were a positive surprise. In Germany, a growth of 1.1% was recorded on an annual level, and in France, a growth of 0.6% was recorded. Similar to the USA and other countries,
The purchasing managers’ indices of the Eurozone point to a contraction in activity in October. fell to the level of 46.6 points and indicates this is the fourth consecutive month of contraction, and the services index fell to the level of 48.2 points.
| Great Britain: Rishi Sunak was elected Prime Minister, and was welcomed by the markets.
In the weekly summary, the British currency strengthened by 2.8% in relation to the dollar, and on the stock exchange the FTSE 100 index registered a weekly increase of 1.1%. On the other hand, the signs of a marked slowdown in economic activity are increasing. The business activity index fell in October for the third month in a row, and the index of total output (industry and services) reached 47.2 points in September, the lowest level in the last 21 months.
| China: Contraction in industrial and service activity in September.
The Purchasing Managers’ Index for the industrial sectors fell in September to 48.1 points from a level of 49.5 points in August. The decrease in the index was recorded due to the effect of closures and restrictions imposed with the renewed spread of the corona virus. Among the items that contributed to the contraction in activity, the declines in new orders and exports stood out.
The Purchasing Managers’ Index, also from Caixin, fell from 55 points in August to 49.3 points in September. This is the first contraction in activity since May.
PDF document: The complete weekly review of the working economists
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