recent economic developments - Bank Leumi

Leumi Economic Weekly July 05, 2017 The rate of increase of credit card purchases moderated slightly in May Credit card purchases by private consumers declined 2.2% in real terms in May compared to the preceding month (seasonally adjusted data). This is the sharpest monthly drop since July 2014, back when Operation Protective Edge started. It is notable that May’s decline occurred primarily against the backdrop of a sharp decline in purchases of clothing and shoes, together with more moderate declines in leisure and entertainment, and also accommodation and flight services. Total sales value of credit card purchases Base 2002=100, constant prices, seasonally adjusted data 295 290 285 280 275 270 265 260 255 250 245 240 235 230 225 220 215 210 205 200 195 190 185 180 175 170 165 160 155 150

12% 11% 10%

Average rate of change since 2014: 7.9%

9% 8% 7% 6% 5% 4% 3%

Rates of change 3M/3M - right scale

Credit card purchases index - left scale

The decline in May led to a moderation in the rate of increase of credit card purchases. Thus, in the three months ending May this year, there was a 7.2% increase compared to the parallel period last year, this following increases by rates of 8.3%-8.7% in the four preceding months. In addition, we note that the rate of purchases fell to below the multi-year average from the beginning of 2014 (see accompanying chart). These data indicate a slight moderation in the rate of increase of private consumption recently; however, it is important to wait to analyze the data in the coming months in order to determine if there is indeed a substantial change in the trend. On this regard, we note that additional data also indicate a slight moderation in private consumption, including: a moderation in the revenues of retail chain stores due to a relatively sharp decline in May, and also a slight moderation in revenues in the trade sectors. It should be emphasized that there have been no substantial changes in the macroeconomic environment that on their own can explain the current slowdown in the rate

BANK LEUMI LE-ISRAEL, THE FINANCE DIVISION The Economics Sector, P.O.Box 2, Tel Aviv 61000

Ph: 972-76-885-8737, Fax: 972-77-895-8737, e-mail: [email protected] http://english.leumi.co.il/Home/

of purchases. Even though it increased slightly in recent months, the unemployment rate is still low from an historical perspective (3.9% for persons aged 25-64 in May) and continues to indicate the economy is approaching full employment, wages in the economy continue to climb, the disposable income of households is expected to increase in light of recent moves by the government (the “net family” plan), the value of assets held by the public (both real and financial) continues to increase, and consumer confidence is high. Furthermore, the low interest rate and inflation environments are expected to continue in the near future. All the factors listed above contribute towards the strengthening of the purchasing power of households. In summary, the data on credit card purchases in the economy point towards a continuing increase in private consumption also during the second quarter of this year, yet with a slowdown in the rate. Overall for 2017, in our opinion private consumption will return to a “normal” pace of growth of 4% in real terms, which reflects an annual growth rate of 2% per capita, following an extraordinarily high growth rate last year, primarily against the backdrop of a sharp increase in automobile purchases. Private consumption is expected to continue to lead economic growth in Israel also in the foreseeable future. The shekel continued to strengthen also in the second quarter of 2017, while its rate of increase slowed slightly The shekel’s appreciation continued also in the second quarter of 2017, while its pace of strengthening slowed. The exchange rate of the shekel vis-à-vis the currency basket strengthened 1.3% during the second quarter of the year, this following an appreciation of 4.2% in the first quarter. In light of this, the shekel reached its peak level of strength from an historical perspective (see Chart 1), which also reflects an extreme point of a lack of competitiveness. This development will continue to weigh primarily on Israel’s export of goods, with an emphasis on sectors that are sensitive to changes in the exchange rate, including: chemicals, rubber and plastics, as well as machinery and equipment (according to research from the Bank of Israel). Chart 1: Nominal Exchange Rate (NIS vs Basket of Currencies) Appreciation (-)/Depreciation (+), Base index=1.1.2010 98 97 96 95 94 93 92 91 90 89 88 87 86 85 84 83 82 81 80 79 78 77

2

_______________________________________________________________ __ BANK LEUMI LE-ISRAEL, THE FINANCE DIVISION

The appreciation of the shekel in the second quarter of this year vis-à-vis the currency basket was the result of the continued strengthening of the shekel vis-à-vis the US dollar. During this period the shekel appreciated 3.7% vis-à-vis the dollar, this after the shekel strengthened 5.5% against the dollar in the preceding quarter, and thus the shekel appreciated by a relatively sharp rate of 9.0% in the first half of the year. In contrast, the shekel depreciated 2.7% vis-à-vis the euro during the second quarter of the year. This was due to, among other things, the strengthening of the euro in the world against the backdrop of a number of factors, including: a continuing gradual improvement in the macro-economic environment in most European countries, a slight decline in political risks across the continent, and estimates that the process of monetary policy normalization on the part of the European Central Bank (ECB) will start earlier than originally projected. Chart 2: The Shekel Exchange Rates vs the 3 Main Currencies Appreciation (-)/Depreciation (+), daily data 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 4.5 4.3 4.1 3.9 3.7 3.5 3.3

NIS vs Dollar

NIS vs Euro

NIS vs GBP

It should be emphasized that the Bank of Israel (BoI) is trying to act almost completely on its own against the underlying forces that are supporting the continuing long-term strengthening of the shekel. These underlying forces include: very strong external accounts, a positive fiscal profile, the potential of Israel’s natural gas sector, and the country’s strong high-tech sector. On this regard we note that the policy instruments used by Israel’s central bank in its attempt to halt the appreciation of the shekel include a near-zero interest rate and an almost unlimited level of foreign currency purchases. Currently, the value of the BoI’s foreign currency reserves is more than US$100bn. In light of the data noted above, it can be assumed that the current degree of intervention by the BoI in the foreign exchange market is not intended to fully halt the continuing appreciation in the exchange rate of the shekel, which is supported, as mentioned above, by the strong fundamental factors of the Israeli economy. There is no doubt that more action is required for this purpose, including fiscal and structural steps that have the goal of improving the business environment in Israel, and improving the degree of competitiveness of Israeli exporters through channels other than through the lens of the exchange rate. 3


In summary, the shekel is expected to remain a strong currency – a development that is expected to delay the timing of an initial interest rate hike by the BoI. In our opinion, the necessary, although not sufficient, conditions that will lead to an initial interest rate hike during 2018 include: the return of the inflation environment (both actual inflation and expected inflation) to close to the middle of the government’s 1%-3% price stability target range, staying there permanently and not only temporarily; a number of additional interest rate hikes in the US; and the continued expansion of local economic activity at a rate of 3.0%-3.5%. In recent months there has been an increase in goods exports to European countries, and a decline in exports to Asia Israel’s foreign trade data broken down by country show that in recent months there have been slight differences in goods export activity vis-à-vis the country’s main export destinations. Thus, analysis of the export data (in dollar terms) according to the primary trade destinations shows that in recent months there has been an upward trend in Israeli goods exports (excluding ships, aircraft, and diamonds) to European countries, this primarily the result of an increase in exports to Belgium, Britain, and Slovenia. In parallel, exports to the US remained relatively stable in recent months. In contrast, as can be seen in the accompanying chart, the decline in exports to Asian countries has been continuing, against the backdrop of a decline in exports to Vietnam, Malaysia, and India. Israel's exports of goods by main destinations Excluding ships, aircrafts and diamonds, millions of USD, trend data 1,400 1,300

1,200 1,100 1,000 900 800 700

Other Countries

Asia

USA

European Union

Looking forward, Israel’s goods exports are expected to return to growth in 2017, this following two consecutive years of declines in 2015-2016. The factors supporting Israel’s export activity include, among other things: the expected return of Intel Corporation to a heightened level of production during the year, this after the conclusion of the upgrade of its facility in Kiryat Gat; and an improvement in economic activity among most of Israel’s trade partners. However, the strong shekel will continue to weigh on Israeli exporters (see details in the section above). At the same time, Israel’s services exports, which are less sensitive to the exchange rate, are expected to 4


continue to increase at a rapid pace. In our opinion, exports of goods and services from Israel are expected to increase by a real rate of 4.7% in 2017

Author:

Yaniv Bar

The data, information, opinions and forecasts published in this publication (the “Information”) are furnished as a service to the readers and do not necessarily reflect the official position of the Bank. The above should not be seen as a recommendation and should not replace the independent discretion of the reader, nor should it be considered an offer or invitation to receive offers or advice – whether in general or in consideration of the particular data and requirements of the reader – to purchase and /or to effect investments and/or operations or transactions of any kind. The Information may contain errors and is subject to changes in the market and to other changes. Likewise, significant discrepancies may arise between the forecasts contained in this booklet and actual results. The Bank does not undertake to provide the readers with notice, in advance or in retrospect, of any of the aforementioned changes by any means whatsoever. The Bank and/or its subsidiaries and/or its affiliates and/or the parties controlling and/or parties having an interest in any of them may, from time to time, have an interest in the information represented in the publication, including in the financial assets represented therein.

5
