| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
| The war continues, inflation in Europe will skyrocket – the central bank will go on hold
The world supply shock as a result of the war continues to intensify with another abnormal rise in commodity prices. In the coming months we will see higher inflation and lower growth all over the world than we estimated just a few weeks ago.
Aside from the deep recession that will be inflicted on Russia, growth in large parts of the world will be hurt. Europe is expected to suffer due to a reduction in demand in light of the sharp rise in the prices of electricity, fuel and other commodities, a decline in investment and recruitment, especially in manufacturing.
At the same time we do not see a recession in Europe in light of the positive momentum following the removal of corona restrictions and the ability of governments to expand fiscal policy with the help of low borrowing costs and the ECB’s acquisition program.
According to the initial estimate, the eurozone rose to 5.8 percent in February, with energy prices contributing about 3.5 percentage points. At current prices, inflation will continue to rise in the next two months.
In our opinion, the decision in the eurozone this coming Thursday will see a sharp upward update in the inflation forecast. Despite this, we believe that the Bank is currently signaling that it does not intend to reduce its expansionary policy in light of the dangers to growth and its inability to influence energy prices, which are the main source of inflation.
In addition, we believe that the Bank will emphasize that it is prepared to inject liquidity into the European banking system if necessary in light of the exposures to the Russian financial system.
| The war will not stop Powell
The damage to the US economy will be lower, given its independent energy sources, but the sharp rise in fuel prices will moderate the increase in private consumption.
The high rate of wage increase alongside the significant one that also comes from the services (rent, wages, etc.) will lead in our estimation to the Bank raising it by a quarter of a percentage point next Wednesday. This was also signaled by the Governor of the Central Bank in his latest announcement to Congress.
We expect a consistent rise in interest rates in the coming months (a quarter of a percentage point at a time), as the war and its prolongation will make it difficult for the central bank to raise interest rates in larger installments even when inflation crosses the 8 percent line in the coming months.
| In Israel: Inflation will jump and growth will be hurt, but less so
The impact on global growth will also reach Israel, but at a moderate rate relative to Europe in light of the strong momentum in the economy and the strength of the employment market. The labor force survey for the first half of February showed stability at an expansion rate of 5.5 percent, while the participation rate rose to its pre-crisis level.
The shekel also remained strong, since the beginning of the war the shekel has strengthened by 2 percent against the currency basket (a 2% depreciation against the dollar, against a 3% appreciation against the euro). Israel’s exports of services, which have risen by 38 percent in the last 12 months (seasonally adjusted in dollar terms), are one of the main reasons for this. In our estimation, data for the end of 2021 to be published this coming Thursday will emphasize this.
In addition, Israel has a lower dependence on short-term changes in world energy prices (thanks to the gas reservoir, regulated electricity prices and the tax structure on fuel) and the lower weight of industry in GDP.
However the huge changes in prices will cause the 4 percent line to cross in the coming months. The impact on the construction input index will be even more significant against the background of the fact that about half of the index consists of imported goods.
The protocols of the Bank of Israel from the last interest rate decision (before the outbreak of the war) showed that all the members supported leaving the interest rate unchanged but they estimated that in the coming months they would start raising the.
The interest rate decisions of the central banks in Europe (Thursday) and the United States (next Wednesday) will have an important weight in the decision of the Bank of Israel in about a month (April 11).
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.