| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
| highlights:
- In our opinion, growth is expected to slow in the first quarter of 2022, in light of the fear of another wave of illness. The labor market is already tight and characterized by wage pressures, so it too is expected to slow down in the coming year. We still believe that the negative real interest rates, and the large investments in technology, will bring the growth to a high level of about 4%.
- The level of construction starts this year may approach 60,000 housing units this year, and a similar number if not higher than next year. In our opinion, this level is already in line with Israel’s demographic needs during this period, but it seems that the stock of dwellings is still low due to insufficient levels of construction starts in previous years.
- The damage to the world’s production chain is already largely reflected in prices, and the dynamics of inflation will now be more affected by developments in the labor market, and especially wages. The inflation forecast for the next 12 months is 2.0%.
- Although the change in the consumer price index in Israel is at an annual level close to the target center, if we consider other macro-stability considerations related to price changes, such as real estate and credit in the economy, these justify a less expansionary monetary policy in Israel as well. We therefore estimate that the interest rate will also rise in Israel next year, slightly after the Fed interest rate.
| Israel: Growth is expected to slow
The list of red countries to which flights are banned is growing, and the government is preparing for another wave of morbidity in the coming weeks. At present there are no restrictions on trading activities and services.
Bank Hapoalim’s consumer confidence index, signals a continued expansion of private consumption, but at the same time we estimate that consumption of services, which has grown significantly in recent quarters, will slow down slightly due to the fear of infections.
The Purchasing Managers’ Index for the manufacturing sector fell in November and is now close to the border between expansion and a slowdown in activity. It is possible that the momentum of the industry’s rapid growth has weakened slightly, and this can also be seen in the monthly economic indicators published by the CBS.
The industrial industry, for example, has risen at a slow pace in recent months with most of the increase attributed to the pharmaceutical industry. On the plus side, the employment component has been above the 50-point level for the past 16 months, signaling high demand for industrial workers.
In our opinion, growth is expected to slow in the first quarter of 2022, in light of the fear of another wave of illness. The labor market is already tight and characterized by wage pressures, so it too is expected to slow down in the coming year.
We still believe that the negative real interest rates, and the large investments in technology, will bring the growth to a high level of about 4%.
| Real estate market – supply responds to price increases.
In the months of October 2020 to September 2021, building permits were issued for 61.7 thousand dwellings. The annual rate of construction starts in the first three quarters of 2021 stands at about 55,000 – which is the annual level of construction starts in the previous five years as well.
At the same time, the CBS tends to update the data of recent quarters upwards, so that the level of construction starts may approach 60,000 housing units this year, and a similar number if not higher than next year.
In our opinion, this level is already in line with Israel’s demographic needs during this period, but it seems that the stock of dwellings is still low due to insufficient levels of construction starts in previous years.
The CBS Housing Price Survey indicates a sharp rise in prices of 10.3% in the last year. The rise in housing prices is a global phenomenon that we believe is explained by the negative real interest rates, and in the short term is less dependent on supply factors.
The level of construction starts of about 60,000 units per year, and possibly also a certain increase in interest rates, will slow down in our estimation the price increases in 2022.
A large surplus of $ 5.3 billion in the current account of the balance of payments in the third quarter of this year. Net direct investment was $ 2.5 billion.
The basic factors continue to support a strong shekel, and the shekel’s exchange rate against the effective currency basket continued to strengthen last week to a new high. From the beginning of the year, the shekel strengthened against the basket of currencies by 8.6%.
For the month of November it decreased by 0.1% according to our forecast. In the last 12 months, the index has risen by 2.4%, a very low rate relative to inflation in most countries of the world. The decline in the index was influenced by seasonal factors that affected items such as fruits and vegetables, travel prices abroad and recovery and recreation.
An increase in the prices of disposable utensils following the imposition of the tax affected the section of furniture and household equipment. There was also an increase in the housing section to an annual level of 2.6%.
We estimate that the damage to the world production chain is already largely reflected in prices, and the dynamics of inflation will now be more affected by developments in the labor market, and especially wages.
In some sections of the index, such as clothing and footwear and travel abroad, the price level at the base point is affected by the corona, and prices are expected to rise in our opinion in a scenario of remission of morbidity.
Taxation policy is expected to contribute to inflation in the coming months: an increase in purchase tax for investors is expected to contribute as a promille to the December index, and the tax on sugary drinks to about half a promille to the January 2022 index. The inflation forecast for the next 12 months is 2%.
The low inflation in Israel relative to the world allows the Bank of Israel to postpone the start, which in itself increases inflation in property prices, especially real estate.
Although the change in the consumer price index in Israel is at an annual level close to the target center, if we consider other macro-stability considerations related to price changes, such as real estate and credit in the economy, these justify a less expansionary monetary policy in Israel as well.
We therefore estimate that the interest rate will also rise in Israel next year, slightly after the Fed interest rate.
| Global: A volatile trading week
The week ended with declines in stock indices amid rapid spread of the Omicron strain, the Fed shifting to a less expansionary policy in the future, and a surprising rise in UK interest rates.
In the weekly summary, the Nasdaq indices decreased by 3%, 1.9% and 1.7%, respectively. The 600 indices decreased by 0.9% and 0.4%, respectively.
In Asia, stock indices in Hong Kong, India and China fell 3.4%, 3% and 2% respectively.
The price of a barrel of petroleum fell by 3.0% this week to $ 73 a barrel, and the commodity price index fell by 1.5%. In the foreign exchange market, the dollar strengthened by about 0.6% against the euro and the basket of other currencies.
| The Fed announces accelerated tapering of bond purchases
Fed members now expect three in 2022 and three more raises in 2023. Powell’s speech was seen as hawkish, the word transitory in relation to inflation was dropped, and the outlook on the labor market is different now.
If until now it was emphasized that the American economy has not returned to the level of employment before the corona, now the emphasis is on, and even more so on, the development of wages.
The tapering process has been accelerated to a $ 30 billion reduction in monthly purchases, which is expected to be completed in March 2022. Powell noted that there is no delay between the closing date for bond purchases and the first interest rate hike – meaning interest rates could rise by the end of the first quarter.
| The bond market has received Fed estimates with a degree of skepticism
In the short term, the market has aligned with the Fed’s estimates that the interest rate will be raised three times as early as 2022, but it is not convinced about the estimate that the interest rate will reach 2.5% in the long term. The yield curve has flattened, and it expresses a pessimistic assessment that a slowdown in growth, or a sharp correction in the markets, will prevent the Fed from continuing to raise interest rates.
According to futures trading on the Fed interest rate, the market estimates that the Federal funds rate will reach 1.3% by the end of 2023, lower than the half of the Fed members’ forecasts, which stands at 1.6%.
The yield curve in the US continued to flatten last week as the yield to maturity on US government bonds fell from 1.48% to 1.41%, and the yield fell more moderately from 0.66% to 0.63%. Years dropped to 75 basis points.
At the same time, capital market inflation expectations for the five years ahead fell from 2.76% to 2.65%, and ten-year expectations fell from 2.44% to 2.38%.
| US: Addition to debt ceiling
Following Senate approval, President Biden was quick to enact an additional $ 2.5 trillion in the public debt ceiling. Without taking this step, the administration would have found itself in a state of insolvency over its debts.
The increased debt ceiling will also apply to 2022, but during the year it will be necessary to discuss its expansion again, specifically in the year in which midterm elections will be held in the House of Representatives and the Senate, which could complicate the political picture.
As for approving the president’s socio-economic plan, there is still not the required majority in the Senate, following opposition from one of the bloc’s Democrats.
| Economic indicators point to high growth in the fourth quarter of 2021
Markit’s Purchasing Managers’ Index for total output in December fell slightly to 56.9 points from 57.2 points in November. The index for the manufacturing sector and the index for the services sector still indicate expansion at a high level.
The index rose by half a percent in November, and for the past two months the level of industrial production has been above the level before the outbreak of the corona.
Sales rose 0.3% in November, below expectations, after a sharp rise of 1.8% in October. Apparently, many households were ahead of their purchases towards the end of the year holidays for fear of a return to closures and restrictions on activity.
In the real estate market, activity continued to expand. Construction starts rose by 11.8% in November, reaching 1.67 million units, an increase of 8.3% compared to November last year. Construction permits also rose in November. Growth forecasts for the fourth quarter are all about 7.0%. At the annual level.
| Interest rate hikes in England and Norway
Surprisingly, the Bank of England by 15 basis points to 0.25%. The rise in interest rates was recorded after the inflation rate rose to 5.1% in November, the highest rate in the last decade, but the timing was surprising due to the sharp rise in morbidity rates from the UK.
As expected, the central bank raised the interest rate by 25 basis points to 0.5% per year. Similar to the UK, November inflation also reached a high annual rate of 5.1% there.
| Eurozone: The Central Bank (ECB) signals continued policy expansion
Although the bloc rose to 4.9% in November, it remained unchanged in the latest decision, and the president of the central bank, Lagard, stressed its assessment that interest rates will not rise in 2022, mainly against the background of the spread of the corona.
Although the ECB announced the termination of the emergency plan for the purchase of bonds, in March, at the same time the regular purchase plan will be increased to prevent a shake-up following the above-mentioned decision. In Germany, the IFO Institute’s index dropped to 94.1 in December, the lowest level since February this year.
| China: The central bank is stepping up its intervention in the foreign exchange market in order to moderate the strengthening of the local currency.
The appreciation of the Chinese currency against the dollar peaked in mid-December 2018 and decision-makers are working to halt this process. Therefore, they raised the on foreign currency accounts. At the same time, quotas for investments abroad were raised by licensed local investment managers.
Moreover, November data indicated foreign exchange purchases in the market by the central bank on a large scale over the past six years. On another issue, at the government’s main economic conference towards 2022, the leaders stressed maintaining economic and social stability as a key policy objective.
It seems, therefore, that the expansionary fiscal and monetary policy will continue in the coming year. Although industry output rose handsomely in November, the emergence of Omicron morbidity cases could lead to closures and restrictions that would hurt activity.
In the PDF document: the full weekly review of Bank Hapoalim economists
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.