In the country
Cautious optimism in the Bank of Israel In view of the rapid vaccination campaign, the interest rate will not change any time soon.
Growth in 2020 was less bad than we thought, thanks to strong growth in the last quarter. Following this, and following the continuation of the vaccination campaign, we updated our forecast for 2021 to 5.1 percent this year.
The labor market is still hesitant, companies are not yet significantly increasing the number of employees.
In the world
U.S. retail sales exceeded early expectations thanks to direct government assistance. Significant assistance also raises the growth forecast.
Inflation expectations in the US (and around the world) continued to rise and with them the steepness of the yield curve.
The increase in demand for products at the expense of services leads to continued pessimism in service companies in Europe and, on the other hand, in the highest optimistic industrial companies for about 3 years.
The successful vaccination campaign in the UK and the sharp drop in morbidity continue to support a rapid recovery in growth starting in the second quarter of this year, and also support the pound.
The vaccines gave the Bank of Israel optimism, but it does not hint at a close change in policy as expected, the Bank of Israel’s interest rate remained unchanged at 0.1 percent and the Bank also did not change its acquisition plan. The press release was slightly more optimistic in light of the rapid progress of the immunization program, which increases optimism about growth later this year. But the bank stressed that the risks are still high, given the new variants of the virus, and it does not anticipate a rapid recovery in the labor market.
The announcement does not change our assessment that the chances are slim that the Bank of Israel’s interest rate will fall, and that it will remain unchanged for a long time. The Bank will continue to focus its activities on the purchase of foreign currency and the purchase of government bonds in order to ensure that the government’s raising costs do not increase.
Following the better-than-expected growth data, we are updating our growth forecast for 2021 upwards
The CBS published growth data for 2020, which indicated a 2.4 percent decline in GDP. Although this is the sharpest annual decline since the measurements began, the figure is better than our early forecast (and that of the Bank of Israel, the Treasury and the IMF).
The upward surprise is due to a positive growth of 6.3 percent at an annual rate (3% less vehicle imports) in the last quarter of 2020, which we expected to be weaker in the face of closures and restrictions on activity. But strong exports of services, along with an unusual increase in investment (not just vehicles), with an emphasis on machinery and equipment, contributed to an upward surprise.
Following this, we updated our forecast for 2021 to 5.1 percent (4.4% in the previous forecast), leading a double-digit growth forecast in private consumption (about 11%). It is important to note that even after the update, we expect that GDP per capita at the end of the year will still be lower than before the crisis. Even the labor market is still far from pre-crisis levels, and despite the decline in uncertainty in the face of the successful vaccination campaign, companies are still reluctant to re-increase their workforce. This is reflected in the total number of vacancies in January, which remained stable, but is still close to 40 percent lower than in January last year.
The government has divided, consumers have wasted, and the dilemma of the central bank is rising
U.S. retail sales in January exceeded early expectations and jumped 5.3 percent. The direct payments households received, even from Trump’s previous aid program, contributed greatly to this, spreading the surge in morbidity in January. If the weather improves, and in light of the decline in morbidity and advances in vaccines, we will see in the coming months an upward update of growth forecasts.
These factors have contributed to a continued rise in inflation expectations and the curvature of the yield curve, but recent central bank protocols continue to stress that bank members believe it is too early to reduce support, with an emphasis on the labor market in which recovery has stalled. This is also the case according to the total weekly demands for unemployment benefits, which rose to 800,000 in the previous week, and in fact there has been no improvement since December.
We expect the Governor of the Central Bank to maintain this line in this week’s testimony in Congress, emphasizing that a temporary rise in inflation is expected in April / May due to the ‘edge effect’.
Part of the increase in prices is also explained by the surge in shipping costs and commodity prices, which contributed to the increase in the producer price index. In January, the index jumped by 1.3 percent (1.8% in the last 12 months) and this will be reflected in the consumer price index in the coming months. In our opinion, if the strength of private consumption and the rise in inflation expectations continue, this will make it difficult for the central bank to justify the continuation of the purchase program in the second half of the year as well. Especially if Biden’s additional assistance plan passes and includes significant direct payments to each household.
Europe – two-speed economy.
In contrast to the US, which continues to grow, economic activity in the eurozone continued to shrink in February, according to preliminary estimates for Purchasing Managers’ indices. On the services industries, the index dropped to 44.7 points.
Despite the general weakness, manufacturing continues to gallop forward as the index jumped to 57.7 points, the highest reading in about 3 years. The figure was better than expected due to the continued increase in demand for exports (with an emphasis on Germany), and the transition in the last six months worldwide to the consumption of products at the expense of services. The improvement has also led companies in Europe to increase their workforce (slightly), for the first time in about two years. Purchasing managers’ indices in Australia and Japan also showed a continued rise in the optimism of manufacturing companies, with
The consistent growth there (thanks to China) is also leading to a sharper rise in demand for workers in the industry.
First in vaccines
The vaccination campaign in the UK continues to progress rapidly, second only to the US. This continues to be reflected in a decrease in morbidity and an earlier end to the restrictions on activity, which will lead to strong growth in the coming quarters.
