Israel
The government has decided to extend the closure until the end of the month. The number of new infections began to decline, and the number of vaccinated reached about 2.5 million people. Similar to previous closures economic activity in January has probably declined and this can be seen in credit card purchases for example. The broad unemployment rate began to respond to the closure as early as the second half of December when it rose to a level of 13.7%. Due to the tightening of the closure in January, it seems that the unemployment rate continued to rise.
The Purchasing Managers’ Index for December recorded a sharp decline, especially in the export orders component. It is difficult to know what the real impact of the crisis on the economy is, and it is likely that the picture will only become clear after the economy opens up, and the government begins to reduce aid programs. Some surveys show that most workers in the IDF do not have a job waiting for them, but it is very possible that the reduction in government assistance will force them to return to the industries that will return to work, such as tourism, recreation and culture.
The public debt-to-GDP ratio rose by 13 percentage points in 2020 to a level of 73%. The increase in debt is slightly conditioned by the effect of the appreciation and negative inflation, which slightly reduced the debt in shekel terms (an effect of about a percentage point in our estimation). The public debt-to-GDP ratio is still low compared to the eurozone (101%) and the US (131%), so Israel’s bonds continue to be perceived in the world debt markets as a relatively safe asset. Inflation risk in Israel is also perceived as relatively low. The budget deficit is expected to remain high in 2021 as well, reaching a level of about ten percent of GDP. The public debt-to-GDP ratio is expected to rise to about 80% by the end of 2021.
The shekel depreciated over the past week by about 1.5% against the currency basket. The devaluation this time was in contrast to the correlation with world stock prices (which continued to rise), which may be an indication of a change in players’ estimates in the foreign exchange market following the Bank of Israel’s announcement of a $ 30 billion acquisition plan. , Since circumstances may be less favorable then, and in the coming months we are therefore likely to see relatively large foreign exchange purchases, of at least $ 2.5 billion per month.
We continue to estimate that purchases of this magnitude are significant, are larger than the expected surplus in the current account of the balance of payments, and support the weakening of the shekel in 2021. Bank of Israel purchases are limited in quantity and time, so they can not affect the long-term trend. Do not have an impact on the long term so why would they affect the short term (markets are efficient and know it).
For example, perhaps the weakening of the shekel, invites foreign investors to increase exposure to it. This claim is true at the theoretical level, but in our estimation, there are not many financial players in the forex market who take long-term positions, which are affected by the strength of the shekel. Institutional investors in Israel do take the exchange rate into account in their hedging decisions. Forex exposure.
Inflation expectations continued to rise in all ranges, apparently as a result of the policy of buying foreign currency and the depreciation of the shekel. The inflation embodied in the bond market over a five-year period, for example, has risen by close to 20 basis points since the beginning of the month to a level of 1.45%.
The level of inflation inherent in the market is high relative to actual inflation, and this is not unique to Israel. Given the current levels of inflation expectations, we estimate that they include a risk premium component, meaning that the market estimates that there is a probability even if not large, that we will see inflation erupt to a level higher than 2%. We raised the inflation forecast for the next 12 months to 0.7%, partly against the background of the assessment that we will see an upward correction in the exchange rate in the coming months.
The interest rate decision protocol reveals that one of the members supported, as in previous decisions, the reduction of the interest rate to zero and did not exclude negative interest later on. The rest of the members preferred the use of existing monetary tools, and estimated that the current degree of monetary expansion was sufficient. We estimate that the chances of reducing interest rates to zero have diminished in light of the decision to acquire $ 30 billion during the year. A purchase of $ 30 billion for which the central bank will “print” about NIS 100 billion, as well as purchases of another NIS 40 billion in government bonds, will continue to increase liquidity in shekels in the financial markets. Shekel deposits, especially current deposits, are expected to grow rapidly during 2021.
global
Although the closure measures of recent weeks have begun to affect world infection rates and have moderated slightly in the past week, however, mortality rates are still high, and closure policy is expected to continue at least until the end of the month. Europe remains at the center of outbreaks and restrictions on movement and trade on the continent are intensifying, along with supply and distribution restrictions on vaccines that are slowing the population’s immunization rate.
Global industrial activity, led by the high-tech sector, continues to recover, while the global services sector, especially in Europe, has been hit by the prolongation and expansion of closures. Purchasing managers’ indices for the manufacturing sector in most countries indicate the expansion of activity, while the services sectors for the most part indicate a contraction in activity.
Despite high morbidity, U.S. stock markets recorded sharp price rises on the inauguration of the 46th U.S. President, and continued to rise later this week. The cracking index reached a new high last Friday and concluded a weekly rise of 4.2%. The other US stock indices have risen between 1.0% and 2.0% in the past week, while in Europe and Japan most of the indices remained virtually unchanged last week.
Last week, Joe Biden was sworn in as the 46th president of the United States, and on his first day in office, the president signed 15 presidential decrees, including the closure of the wall between the United States and Mexico, the repeal of Trump’s order banning entry from Muslim countries and rejoining To the Paris Agreement. The U.S. president has also put the fight against corona as a priority for White House staff. The president has already begun deploying a large number of teams focused on two main issues: curbing corona spread and spreading as much vaccine as possible, as well as increasing support for the needy. In employment, and in economic recovery, the president decided to extend the provision of food stamps to the needy and unemployment benefits. The administration also began the process of enacting a minimum wage of $ 15 per hour. The existing minimum wage is $ 7.25 per hour, unchanged from 2009. In practice, a number of policies and municipalities have independently decided to raise this salary in recent years. A key focus of the president’s economic policy is the $ 1.9 trillion bailout plan, which must pass Senate approval, and is likely to face opposition from some Republican senators. A compromise between the two parties on a plan on a slightly smaller scale than that proposed.
U.S. macro data is mixed, and in part reflects the restrictions due to the spread of the virus. The number of new unemployment benefit demands has dropped slightly to 900,000 in the past week, but the level of demands is still high and reflects the continued effects of the corona crisis. Estimates for the Purchasing Managers’ Indexes for January, from Markit, were a pleasant surprise. The index for total output rose from 55.3 points in December to 58 points in January. The index for manufacturing rose to 59.1 points and the index for services rose to 57.5 points.
The US real estate market is enjoying low interest rates. The housing market continues to show strength and in December the trend of expansion in activity continued. In December, there was a sharp increase of 5.8% in construction starts, building permits increased by 4.5% and completed an increase of 17% in 2020, and in sales of existing homes there was a slight increase of 0.7% in December and an annual increase of about 22% to annual level Of 6.76 million transactions – the highest level since 2006.
Exacerbation of closures and restrictions in Europe. Europe is facing escalation in coronary heart disease. As a result, Germany has announced an extension of the closure until February 14 and in Ireland the closure will be extended until Thursday. A temporary curfew has been declared in the Netherlands, for the first time since World War II, and in England decision-makers are unwilling to commit to a specific deadline. In contrast to the situation in the United States, estimates for the Purchasing Managers’ Index for January reflect the worsening of the contraction in economic activity. The index for total output in the eurozone fell to 47.5 points from 49.1 points in December. This is the third consecutive month. Fell sharply to 40.6 points from a level of 50.4 points in December.
The ECB commits to continue purchases by March 2022. The European Central Bank left the interest rate unchanged, noting in its announcement that interest rates are expected to remain at current levels or lower until inflation expectations are established close to, but below 2.0%. The acquisition plan will also remain unchanged, at a total level of 1.85 trillion euros, at least until the end of March 2022, and in any case until the corona crisis is over.
China’s economy grew by 2.3% in 2020. China’s economy is probably the only economy in which GDP rose last year. In the last fourth quarter, China’s GDP grew by 6.5% relative to the same quarter in 2019. China’s economic recovery was also reflected in industrial production, which rose in December 2020 by 7.3% compared to December 2019.