• The risk of inflation in the world is rising, but in Israel the appreciation of the shekel offsets a significant part of the effects of world price increases. We leave the inflation forecast for the next 12 months at a level of 0.5%.
• We estimate that the short part of the yield curve will continue to be affected by central bank statements, but as the deficits remain high, the perception of future risk will lead to a curvature of the yield curves.
Israel
About one million people have already been vaccinated, and Israel is a leader in the rate of vaccinators out of the entire population in the world. At the same time, the number of new infections continued to rise despite the closure, so it is possible that we will see further tightening and restrictions in the coming days. The level of compliance with closures decreases over time – Google’s mobility indices, for example, show that last week there was a decrease in the level of mobility compared to the previous week, especially for commerce and leisure, but the level of mobility remained high compared to previous closures.
The decline in mobility to workplaces following the current closure was low, in part because activities of industries that do not include reception were allowed. We therefore estimate that the damages in terms of product loss in the current closure are considerably lower than in the previous closures.
Although the fourth quarter was affected by the holiday quarantine at the beginning and the third quarantine at the end, the economic indicators so far are surprisingly positive. In November, credit card sales increased by 10.4% compared to the previous month and by 6.8% compared to October last year. Exports of high-tech services in October were 22% higher than last year. Despite the closures that characterized the fourth quarter, GDP did not shrink significantly, if at all. In an annual summary, the contraction in GDP is expected to be 3.0% to 3.5%.
Assuming the vaccines are effective and no vaccine-resistant strains of corona develop, most of the restrictions on economic activity will be removed in the second half of the year. Restrictions on travel abroad will be left, as the rate of immunization there is slower. Growth in 2021 is expected to be high relative to 2020 mainly due to the low comparison base.
We estimate that the level of GDP per capita in 2021 will still be significantly lower than that of 2019 (the population increased by about 4% between periods). Simultaneously with the opening of the economy, the new government that will be formed will probably begin to reduce transfer payments to the public, and this too will have a moderating effect on growth this year. We expect growth of about 4.5% this year.
The risk of inflation in the world is rising, but in Israel the appreciation of the shekel offsets much of the effects of world price increases. Prices of agricultural commodities rose sharply in December by 8% and by 2020 as a whole by 18%. In Israel, the price of flour is therefore expected to rise in early 2021, and along the way we will probably see increases in the prices of additional raw materials.
The rise in agricultural commodity prices has a greater impact on inflation in developing countries, where basic food carries a higher weight than the consumer basket. In Israel, the most important items are transportation and communications and housing, so the impact on the index is not expected to be high. We leave the inflation forecast for the next 12 months at a level of 0.5%, despite the appreciation of the shekel, due to an increase in the global inflation environment.
The zero interest rate is going to stay with us for a long time. The Governor of the Bank of Israel estimated at the Calcalist Forecasts Conference this week that interest rates will remain low over time in Israel and around the world. In our estimation, it will take a long time before inflation returns to being a consideration in the interest rate decision in Israel, and it is unlikely that this will happen before the US, where inflationary pressures have risen. This statement implies that even if inflation rises in a year and approaches the target range, interest rate decisions Lower inflation than in the past Under this policy, real interest rates will become more negative.
Does a lower interest rate for the Bank of Israel also guarantee a flat yield curve over time? The guidance of the central bank is probably the factor that has a significant effect on the yield curve, and currently the slope of the curve does not embody an interest rate hike until mid-2020, ie a year and a half from today, and then an interest rate of 0.5% in 2023.
At the same time, the slope of the curve may also be affected by factors such as liquidity preference, which may depend on the risk perception of market players, and factors such as government funding needs and central bank money printing. We estimate that the short part of the yield curve will continue to be affected by central bank statements, but as the deficits remain high, future risk perception will lead to a curvature of yield curves.
global
With the start of 2021, the world is eagerly awaiting the expansion of the corona vaccine campaign, while the number of infected continues to grow and many countries are tightening their closures. Despite the sharp increase in the number of those affected, the stock markets recorded a relatively successful end to 2020, with high variance between the indices in the various countries.
Central bank monetary expansions continue to raise financial asset prices, Bitcoin closed the year at a new high of $ 34,000, agricultural commodity prices rose 8% a month and US real estate prices also rose 8% in the past year. Central banks are sticking to inflation targets, and as long as there is no leakage from asset prices to inflation measured in consumer price indices, we will continue to see asset prices rise.
Successful end of 2020 in the financial markets. In the past week many stock indices have set new records and some ended 2020 with a high annual rise. In the US, the cracking index led with an annual increase of 43% followed by the Russell 2000 with an increase of 19%. The S & P500 rose 16% and the Dow Jones recorded an increase of almost 7%. In Europe there was a relatively high variance of market performance. The Dax index in Germany rose by 3.6%, while the stock indices of Spain, France, and Italy fell by 16%, 8%, and 6%, respectively, while the Eurostox 50 index fell by 5%.
In the UK, against the backdrop of the effects of the corona and uncertainty over how the Brexit will perform, the FTSE index has fallen by 15%. 2020 was a good year for the Japanese stock market, with the Nikkei up 16%. The emerging markets index rose 17% in dollar terms. The leading markets were South Korea, China, Taiwan, and India. In the global foreign exchange market, the dollar fell by 8.7% against the euro and by 6.8% against the basket of currencies. As for commodities, gold recorded an annual increase of 20%, money rose 45%, the agricultural commodities index rose by 18%, and barrel prices Brent crude fell 25 percent.
Towards a majority in the U.S. Senate. This coming Tuesday, Georgia will hold re-election to the Senate. During the administration of Donald Trump, his Republican Party controlled a majority in the Senate, while the Democratic Party had a majority in the House of Representatives.
According to the results of last November’s election, the new presidential administration, Joe Biden, will meet in a House of Representatives that will continue to be led by a majority of his Democratic Party, but the situation in the Senate will be decided, as stated, in the upcoming Georgia election. If the Republican majority in the Senate is retained, it could block Biden’s initiatives to raise taxes, if any.
On the other hand, a decision in favor of a Democratic majority in the Senate would allow Biden to pass many more initiatives, and could lead to declines in the markets as a result of fears of raising taxes.
The corona crisis did not hit the U.S. housing market. In the 12 months ending October, U.S. housing prices rose, according to the Case Schiller index, by 8.4%. The rise in prices was accompanied by an increase in the number of transactions. As of November 2020, sales of new apartments increased by 21% compared to November 2019, and sales of existing apartments increased by a similar rate.
Tensions between the US and China as a result of the New York Stock Exchange’s decision to delist three large Chinese companies from trading. This is an application of the US administration’s decision to ban US trade on Chinese companies that provide products and services to China’s military and defense and intelligence systems.
The New York Stock Exchange announcement refers to three leading companies in the field of communications: China Mobile, China Telecom and China Unicom. It should be noted that these companies will continue to be traded on the Hong Kong Stock Exchange. Over the weekend the Chinese government announced that it condemns this decision and it will soon choose what its response will be.
Before Joe Biden arrived at the White House, and it is possible that in a timing of image significance, the EU and China reached an agreement regulating international investment between the parties. The agreement concludes seven years of talks between the parties. The purpose of the agreement is to make it easier for European companies to invest and conduct business in China and vice versa for Chinese companies in Europe.
Under the agreement, China will eliminate the requirement for foreign companies investing in its territory to open up to it the technological infrastructure through which they operate. At the same time, the transparency of each party towards the other regarding the existing subsidies on domestic production will be increased.