| Victor Behar, Director of the Economics Department at Bank Hapoalim, and Hapoalim Economists
| Israel: The growing fear in the world of a slowdown in economic activity will eventually reach Israel as well
We identify two significant differences between Israel, the US and Europe: the lack of dependence on world prices, a factor that moderates inflation in Israel and the damage to the purchasing power of the public, and the second factor is a low budget deficit relative to the US and Europe – the deficit in Israel is expected to be low. % Of GDP, while in the US and Europe the numbers are around 4% to 5%.
The better budgetary situation affects the government’s ability to facilitate budgetary measures on the cost of living (for example on fuel, or tariff reductions). The government’s debt financing needs are low, and there is no process of reducing the central bank’s balance sheet as in the US for example (QT) and this factor also has a positive effect on capital prices in the domestic market.
Signs of a decline in private consumption: Credit card purchases fell 0.4% in March. We estimate that the figure was affected by a sharp increase in the number of passengers abroad, who divert consumption in Israel to consumption abroad (credit card purchases are only local).
We estimate that this trend will continue in the coming months, partly due to the effect of price increases that are hurting the purchasing power of the public.
Raising capital in high-tech continued in the first quarter of the year. IVC data indicates high-tech investments of $ 5.6 billion in the first quarter of the year, although a decrease compared to previous quarters, but a very high amount compared to the years to 2021.
Raising capital is the fuel of high-tech companies, they enable the continuation of activities, investments and payment of salaries to workers in the industry.
The average rate in March fell to 3.4%, and it can be said that the economy returned to pre-Corona employment in terms of employment. We estimate that wage pressures in the economy are high, which is one of the main risks that could cause inflation to remain high.
Decreased in April by 4.4% against the dollar. The devaluation partly reflects the strengthening of the dollar in the world, and against the exchange rate was quite stable. A decline in world stock prices has led institutional investors to purchase large amounts of foreign currency in recent months – about $ 3 billion a month in January and February.
We believe that the basic factors that support a strong shekel have not changed, but in the short term the effect of stock prices is dominant and affects the direction of the exchange rate.
| Inflation forecasts
We are again raising the forecast in light of the devaluation created in the exchange rate as well as the rise in world oil prices to about $ 110 per barrel of type.
The main update is for the May index, which is expected to rise by 0.6% instead of 0.4%. We raise the annual inflation rate to 2.9%. Inflation at the annual level is expected to cross the 4% level in the coming months. Although the Israeli economy does not have a system of linkages to the consumer price index that existed two decades ago, there are still contracts and agreements that depend on the consumer price index and are expected to become more expensive.
The property tax, for example, depends in part on the consumer price index. The prices of the various insurances are often related to the consumer price index. We estimate that in the coming months we will see price increases due to linkage to the consumer price index. In the inflation forecast we give some weight to government policy, which will use tax collection surpluses to moderate price increases in items such as transport, education and food.
The market embodies increases to a level of about 2% in about a year, which means an increase of 0.25% in almost every decision. In the US, the market embodies faster interest rate hikes to 3% in a year. This gap seems reasonable to us in light of the inflation differences between the countries, and a better budgetary situation in Israel than in the US.
The effect of the interest rate on inflation in the consumer price index is very slow, and at the starting point the real interest rates are negative. We estimate that central banks will strive to reach positive real interest rates in the short term, and assuming that inflation expectations do not fall so quickly from 2%, it is likely that interest rates will continue to rise above 2% next year.
| Global: The fear of a slowdown in economic activity is growing
The markets are beginning to embody the fear of a significant slowdown in economic activity, in light of a number of factors, the main of which may be the change in the tone of central banks. Inflation has become a threatening factor that central banks cannot ignore, and markets are expecting a policy that gives priority to reducing inflation even at the cost of slowing down or even risking a recession.
Add to this the prolongation of the war in Ukraine, with headlines of danger to world war, and closures in China due to the spread of the corona, and the result is a sharp drop in the prices of financial assets. The S & P500 and NASDAQ indices fell sharply last Friday and reached their lowest level since the beginning of the year. Stock indices have fallen cumulatively by 14% and 24% respectively from their peak levels.
The declines in some of the stock indices in April were the sharpest on a monthly basis, recorded for several years. The Dow Jones S & P500 and Nasdaq indices recorded weekly declines of 2.5%, 3.3% and 3.9%, respectively, completing declines of about 5%, 9% and 13% in April.
In Europe, the index fell 1% last week, completing a decline of 2.6% in April. In contrast, the UK index rose 0.3% this week, as did April.
In Asia, most stock indices recorded slight weekly declines, except in Taiwan, where the index fell 2.5%.
| US: Surprising GDP contraction in first quarter
The first estimate of 2022 surprised with a contraction of 1.4% on an annual level, this compared to the consensus forecast that growth was expected at a low rate of 1.1%. Although the publication of the figure created some pessimism about the state of the American economy, the analysis of the data showed that private consumption expenditure and fixed asset investments actually rose in the first quarter by 2.7% and 7.3%, respectively.
But their positive contribution to growth has been offset, and even more so, by a sharp rise in imports and a decline in inventories (which appear in total investment). U.S. consumer confidence indices continue to point to a low level relative to the past. The Consumer Board Consumer Confidence Index fell in April and the University of Michigan index rose slightly, but is still at a low level relative to the past.
| A further decline in the rate of private savings from U.S. disposable income
Continued to rise in March by 0.5% (after an increase of 0.7% and 0.2% in the previous two months) while consumer spending rose by a higher rate of 1.1% in March (after an increase of 0.6% and 2.0% in the previous two months).
The increase in the rate of inflation and the decrease in transfers to private individuals, together with the continued increase in household expenditure, led to a decrease in the rate of private savings from disposable income. The savings rate fell in March to 6.2%, a rate even lower than that recorded before the corona crisis, and it is estimated that it may continue to decline in the coming months.
Ahead of this week’s interest rate decision by the Federal Reserve. The Fed is expected to be half a percent at its next meeting this coming Wednesday.
Most of the attention in the markets will be around the accompanying decision and the signals that will be given regarding the policy measures in the coming months, especially now that the risks of a slowdown in activity seem to have increased. The inflation environment continues to be high also according to the PCE index for March, which recorded an annual increase of 6.6%, the highest rate in the last forty years.
On the other hand, this index actually fell to an annual rate of 5.2% in March. Rising wages and employee benefits play a key role in rising inflation. The employment cost index rose by 1.4% in the first quarter, and above 5% at the annual level.
These data reflect, among other things, the tight state of the labor market, which is in a state of full employment with a large shortage of workers. Inflation expectations from the capital market for all ranges remained high. 2.94% for ten years, 3.35% for five years and 4.36% for two years.
In the consumer survey of, the median inflation expected for the coming year remains at a high level of 5.4%, and average inflation expectations for the year between the fifth and tenth year stand at 3%.
| Eurozone: slowdown in growth and rising inflation
The rate in the first quarter was 0.8% at the annual level, slightly lower than forecast. The low growth rate was affected by the war between Russia and Ukraine, including the impact of sanctions imposed by Western countries, as well as continued disruptions in the global supply chain. And 0.7% respectively.
The annual rate remained at a high level of 7.5% in April, but the annual core inflation rate, excluding energy and food, rose to 3.5% compared to 2.9% in the previous month. These rates are significantly higher than the target of 2% per year set by the ECB, and it is estimated that increases will also begin in Europe in the second half of the year.
The war in Ukraine mainly affects European countries, including the eurozone, and many believe that sanctions on Russia may be exacerbated, while in the short term may obscure the economic situation in the bloc.
| China: The administration tries to reassure the public and the business sector and signals that it will take new steps to support economic activity
Expanding infrastructure investments, tax cuts and support measures for households are among the measures being considered. The spread of the corona in many cities in the country, including Beijing and Shanghai, and the imposition of partial closures are hurting economic activity, which in any case shows signs of weakness to the point of shrinking in certain industries.
The Purchasing Managers’ Index fell sharply from 48.4 points in March to 41.9 points in April. The Purchasing Managers’ Index fell to 47.4 points in April, with many enterprises citing supply chain problems as one of the main causes of a contraction in activity.
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.