| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
| Future de-globalization, more inflation, less growth
Uncertainty about the duration of the war between Russia and Ukraine and the intensity of sanctions have contributed to high volatility in the financial markets, which we believe will continue in the near term.
Russia-Ukraine war is another step in the process of de-globalization in the world that began with the Brexit and the election of Trump, intensified significantly in the corona crisis and damaged global supply chains and now continues in an attempt to isolate the world’s 11th largest commodity exporter.
In our view, the de-globalization process will bring the world’s major economies closer together to establish closed trading blocs, and will encourage companies to hold more stock and produce products locally even though they are not economically efficient.
In the medium term, this will create greater variability than before in the rate of inflation (which will be higher in the West and lower in the East) and the rates of interest rates in each trade bloc.
As for the markets’ response to the conflict, we would like to mention that there has been no shortage of geopolitical events in recent decades from which financial markets have eventually recovered: who remembers the fear Greece will retire and dismantle the eurozone, the whole Brexit saga and others.
In addition, as at any event you can also find those who can benefit from it: in the present case, the arms, fertilizer, cyber and commodity industries. Politically, this benefits China and India from continuing to trade with Russia (as they do with Iran), thus being able to reduce the rise in commodity prices through long-term contracts and paying directly in local currency.
| From Russia to our pocket
The immediate impact of the struggle between Russia and Ukraine is of course the rise in commodity prices. Prices, gas and skyrocketing, which contributed to a sharp rise in fuel prices and electricity prices.
But the effect is asymmetrical; It is more moderate in the US and China but more significant in Europe. Along with oil, Russia is a major supplier of raw materials for industry (,,), food products (and corn) and fertilizers.
It’s not that there are no alternatives, but the price that companies will have to pay will be higher. If the conflict does not end soon, the rise will be “rolled over” to consumer prices.
Following recent developments, we have updated the forecast for March to 0.6 percent (fuel, flights abroad), April and May to 0.5-0.6 percent each (holidays and a faster rise in food prices after Passover).
A more significant increase is seen in the index of construction inputs, which is more correlated with changes in commodity prices.
| The prolongation of the war may stop the positive momentum in investment in the industry
It is too early to quantify the damage to the global economy, depending on the length of the war and the intensity of sanctions. High energy prices constitute a “tax” on private consumption and as the war continues, this could reduce the companies’ new investments in the world and reduce the recruitment of workers, in contrast to the recovery trend in the last six months.
Sanctions that included disconnecting Russian banks from the international payment clearing house caused a sharp devaluation of the Russian currency, despite the central bank raising interest rates to 20% and restrictions designed to prevent “running to the banks.”
At the same time, the influx of safe assets continued with a strengthening especially against the euro.
| The dilemma of the central banks: the United States will rise, Europe will stop, the Bank of Israel will continue
Short-term inflation will rise much more than earlier estimates, especially in Western countries. But on the other hand, an increase as a result of supply shock – the rise in oil prices is like imposing a “tax” on the economy and hurting global growth, and keep in mind that central banks mainly affect the demand side so their ability to influence prices in this case is low.
When all is said and done, we believe that the war will not prevent the US Federal Reserve from raising it by a quarter of a percentage point (and not by half) in about two weeks, given the high inflation on the part of domestic demand as well.
In contrast, the central bank in the eurozone will be more cautious and will now withdraw from its intention to reduce purchases more quickly, given the negative effects of sanctions on the eurozone economy.
In addition, if the war continues, the disconnection of Russian banks may lead to a shortage of liquidity in some European banks, which will require the central banks in Europe to even flow liquidity.
For Israel, the higher inflation seen in Israel in the coming months and coming mainly from the supply side should not change the Bank of Israel’s action, in the direction of a moderate increase (2.5 times this year) as long as medium-term inflation expectations are still within target.
| We stay in the country
The MSCI index company has decided not to include Israel in the MSCI Europe index at the moment – a decision that, if made, could have resulted in a handsome investment in shares on the Tel Aviv Stock Exchange and the strengthening of the shekel.
At least for the moment writing these lines neither the stock exchange nor the foreign exchange market seems excited about the European decision.
The author is the head of the Economics and Research Division at Harel Insurance and Finance. The author (s) and / or members of the Harel Group and / or interested parties in them and / or the controlling shareholders of the Group, may hold and / or trade, for themselves and / or for others, the securities and financial assets specified in this review. This review should not be construed as investment marketing or an alternative to investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the opinion of the author at the time of publication, and this may change at any time and without further notice. The Company will not be liable, in any form, for any damage and / or loss caused, if any, as a result of relying on this review, nor does it warrant that relying on the information contained therein may yield profits.