The global markets do not remember such a reality for many years. Inflation is running rampant, the US Federal Bank is sharply raising interest rates followed by the world’s major central banks, Wall Street has been in a bear market for ten months and a look at the past reveals that in the last 90 years only twice have sharper declines been recorded in the nine months of the year. Enough, the war in Eastern Europe only adds more fuel to the fire, fueling the price increases. To what extent does the current situation resemble previous crises?
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“So far this year, and it’s a good thing, the shocks have not created a crisis in the financial systems, including banks, insurance companies, etc.,” says Prof. Leo Leiderman from Tel Aviv University, Bank Hapoalim’s chief economic advisor. He adds that “despite the dramatic increase in interest rates, there is no risk to financial stability in the US and Israel.
“However, as the interest rate increases continue, and at the same time the world enters a recession, the situation may change. Against the background of the very low interest rates in recent years, the level of leverage in the world has increased significantly in all sectors: households, businesses and governments. A significant part of the debts are with variable interest rates. Further increases in interest rates , aside from a slowdown in activity, may lead to insolvency of various parties. We are not there at the moment.”
The big difference between the crisis in 2008 and the current crisis
In recent days, social networks have been filled with rumors about the possible collapse of the Swiss bank Credit Suisse, after the stock fell by 12% at the beginning of the week and then erased the declines.
Could this be the “Lehman Brothers” of 2022 in your estimation?
“It is clear that the bank is running into difficulties, but these are not necessarily related to this year’s macroeconomic developments. With the sharp drop in the share price and the increase in the bank’s bond spreads, there is a fear that it will not be able to raise the resources to carry out the comprehensive reorganization, the details of which are to be published on the 27 in October.
“The heads of the bank repeat and emphasize that the capital situation and liquidity are very reasonable, and in the meantime there is close monitoring of the developments by the supervision of the banks in Switzerland in coordination with the Bank of England. They will certainly make every effort to contribute to the stabilization of the situation without harming the financial system as a whole.”
Prof. Leo Leiderman / Photo: Eyal Yitzhar
Leiderman explains that this time, unlike in 2008, the crisis is more related to the real side of the economy. “The 2008 crisis was primarily a financial crisis, mainly related to the real estate bubble and subprime mortgages, and at its peak was the bankruptcy of the investment bank Lehman Brothers. It was less related to the real side of the economy, and already in the middle of 2009 the US returned to growth.
“On the other hand, this year the impact of the war in Ukraine on the fields of energy, food and other issues that damaged the production processes in the West is also evident this year. The dot.com crisis of the early 2000s mainly expressed the bursting of a bubble that developed mainly in the pricing of technology stocks on the Nasdaq, and in this case too, The resulting slowdown in US growth was relatively short. The crises in 2002 and 2008 were preceded by a period of too low interest rates, which created investment incentives that turned out to be incorrect. This year, too, part of the acceleration in inflation stems from too low interest levels that prevailed until the first quarter of this year.”
Will 2022 be remembered as the year of the capital markets crisis, with sharp declines in stock and bond prices worldwide?
“There is no doubt that a drop of over 20% in the global stock index, alongside a drop of nearly 15% in the global bond index since the beginning of the year, are unusual and very painful phenomena. The main “black swan” that appeared this year is in the form of Russia’s invasion of Ukraine, with all the consequences for commodity, energy and food prices in the world.
“The increase in inflation forced the central banks to raise interest rates sharply, and this led to a repricing of assets. For the financial markets, to quickly move from a Fed rate of 0.25% before the Russian invasion to 3.25% today, and to a forecast of 4%-4.5% at the end of the year, This is a real drama. In Israel, the interest rate went from 0.1% to 2.75% today, and the forecast is for an interest rate of 3.5% in a year.
“The crisis in Ukraine caught the central banks with interest rates that were too low, interest rates that in recent years have led to excessive increases in housing prices and in some of the prices of stocks and bonds. I estimate that a significant part of the acceleration in inflation and the capital losses in the markets this year would have been avoided if the interest rates of the central banks, led by the Fed, had been raised gradually over the past few years.”
What is expected next in the markets?
“It is not possible to time the markets, especially in the short term. The level of uncertainty is very high, and it seems that it will take some time until the situation in the markets stabilizes. As in any crisis, new opportunities have been created, both in the stock channel and in bonds.
“I estimate that most of the interest rate hikes are behind us. Although the Fed’s interest rate hike in November seems very likely, there are increasing estimates that after that there will be a certain lull in the interest rate hike process.
“There is currently a significant accumulation of inflation restraint factors that will also have an effect in the coming months, and at the same time there has been an increase in the risks of recession and financial stability. In this situation, even if it is temporary, stopping the process of raising interest rates by the Fed is not only logical, but also required.”
Just before Yom Kippur, the Bank of Israel raised the interest rate to 2.75% and published an updated forecast that the economy will grow next year by 3% instead of 3.5%, and that the interest rate will be 3.5% in a year.
“Europe will be in recession, and in China growth will slow down”
Leiderman is sure that Israel has a strong economy that shows resilience against shocks, although it is not certain that it will be able to escape a slowdown or even a recession. “In my estimation, the main risk in the world and in Israel goes from the issue of inflation to the issues of slowing down and even recession in activity, as well as to the issues of financial stability.
“Next year, Europe is expected to be in recession, China will suffer from another slowdown in growth, including the deepening of the crisis in the real estate industry, and the United States may also be dragged into recession. In such a situation, GDP growth of 3% in Israel in 2023, which means GDP growth per capita slightly below to 1%, is not guaranteed.”
He adds that the signs of a slowdown are already here. According to the estimates published by the economic department at Bank Hapoalim, it is very possible that the GDP per capita will decrease in the second half of this year, that is, negative per capita growth, mainly due to moderation in private consumption. This, against the background of the increase in inflation and interest and a negative wealth effect as a result of the decline in the capital markets. Among the positive phenomena this year we will note the expected arrival of over 50 thousand new immigrants, a volume we have not seen in the last three decades.
“In less than a month, elections will be held again in Israel, but it is not at all certain that even after them we will see a stable and functioning government here. In Leiderman’s opinion, the biggest problem that will await the next government is the housing crisis, after prices have risen by 18% in the past year. “Israel has not yet solved its problem The scarcity and high cost of housing. This is the number one economic and social problem in the country.”