Leumi Economic Weekly November 30, 2016

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1 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Leumi Economic Weekly November 30, 2016 The composite state-of-the-economy index: the growth in the services sectors is continuing, alongside weakness in the industrial sectors with an emphasis on goods exports The composite state-of-the-economy index increased 0.1% in October compared to the preceding month. This is below the monthly average from the beginning of the year and the lowest increase since April The data also show that the annual growth rate of the composite index is around 3.0% - 3.5%, slightly above the growth rate of the business sector in the last two years The State of the Economy Index - selected components Index, 100=01/2015 Consumer goods import Exports of services Revenue of services activities Exports of goods The components related to private consumption activity contributed to the rise in October's composite index, while the industrial activity components offset the growth rate, similar to the trend over recent months. Thus, increases were registered in the revenues of the trade and services sectors, and also in the import of consumption goods. On the other hand, declines were registered in goods exports, industrial manufacturing, and also in the import of manufacturing inputs. The data underscore the reliance of the current composition of growth primarily on the services sectors; while on the other hand, there is continuing weakness in the industrial sectors with an emphasis on goods exports. Thus, from January 2015 through September 2016 revenues in the services sectors increased 9%, as did also revenues in the trade sectors, and services exports increased 17% from the beginning of 2015 through August In addition, we note that since then and through October 2016 The Economics Sector, P.O.Box 2, Tel Aviv Ph: , Fax: , Gilbu@bll.co.il

2 the import of consumption goods registered a sharp 20% increase, while on the other hand goods exports declined 12% (see accompanying chart). It should be noted that the demographic trends in Israel over recent years have supported an increase in demand for various services and contribute to a continuation of this trend. These demographic trends include: a rise in the rate of increase in the population to 2%, and a substantial increase in in the number of immigrants from developed countries (Western Europe and North America), which moderated during On the other hand, the weakness in goods exports was the result of, among other things, continuing weakness in external demand for Israeli goods on the part of some of Israel's trade partners in recent years, together with company specific events at the country's three largest exporters (Teva Pharmaceuticals, Israel Chemicals Ltd., and Intel Corporation). This was in combination with a deterioration in the competitiveness of Israeli exporters against the backdrop of the continuing appreciation of the shekel, particularly vis-à-vis the pound sterling and the euro. On this regard, we note that from an analysis we carried out it was discovered that the countries that succeed in the realm of exports, despite appreciation of their currencies, accomplish this to a large degree through the ease of doing business an area in which the Israeli economy is characterized by weakness. It can be seen that Israel's current ranking in the "Ease of Doing Business Index" (from the World Bank) declined to 52, compared to 29 in In light of this, there is a need for the economic policy makers of Israel to plan and implement a variety of plans within various areas with the goal of encouraging and supporting business activity in Israel now and in the future. The interest rate of the Bank of Israel remains unchanged at 0.1% for the 22 nd consecutive month The Monetary Committee of the Bank of Israel (BoI) decided on November 28 to keep its interest rate for December 2016 unchanged at 0.1%. Thus, it has now been 22 consecutive months with no change in the central bank rate. Looking forward, we do not expect any change in the interest rate also in the coming months. Regarding the supporting factors behind the decision to keep the interest rate unchanged, the BoI noted that in recent months there has been an uptick in inflation, due to a dissipation of the impact of low energy prices and government initiated price declines (on government regulated goods and services) that "pulled" inflation downwards. Also, the inflation expectations for the medium- and long-terms remained close to the center of the price stability target range (1% - 3%). In addition, the BoI emphasized that "the picture of real economic activity remains positive." Included in this picture are relatively rapid growth in the third quarter of the year and upward revisions to the growth rates of previous quarters, which are consistent with the positive data on the labor market. Furthermore, it was noted that the rise in housing prices is indeed continuing; however, there is a slight slowdown in the rate of mortgage grants against the backdrop of, among other things, a continuing increase in mortgage rates. 2

3 5 Real Bank of Israel short-term interest rate The BoI target rate less market based inflation expectations for the next 12 months Regarding the exchange rate, the BoI noted that its level "continues to weigh on the growth of exports and of the tradable sector." The BoI also referred to the monetary policies of the main central banks around the world, which are expected to continue to be accommodative, and also to the path of interest rate hikes in the US, which is expected to be gradual and slow, also following the expected interest rate hike at the next FOMC meeting that will take place on December 14, In summary, the Monetary Committee of the BoI chose not to change its interest rate, and looking forward, it continues to estimate that "monetary policy will remain accommodative for an extended period." This is because, among other things, the committee members believe the risks to achieving the inflation target are still high. It should be noted that the real interest rate (ex-ante) in the economy, which takes into consideration the capital market derived expectations on inflation for the coming 12 months, has been continuously in negative territory since May. The negative real interest rate (ex-ante) reflects the backdrop of an increase in inflation expectations during these recent months, and after the real interest rate was positive during the first four months of the year (January April). This development likely indicates a moderate increase in the degree of impact of the monetary expansion on encouraging economic activity and on inflation in the economy in recent months. Against this backdrop, it should obviously be asked if such accommodative monetary policy is still required given the expected growth rate, unemployment rate, and inflation environment, and taking into consideration the time required for the impact of policy measures to be felt on activity. In our opinion, the central bank rate in Israel is likely to rise during the second half of 2017, in order to, among other things, let the BoI to achieve, in terms of the policy tools the bank has at its disposal, the proper path that will return the interest rate to a "normal" rate that will also enable it to deal with the possibility of economic slowdown in the 3

4 future. The necessary underlying conditions for a hike in the interest rate to occur include: the return of inflation (actual and expected) to within the price stability target range, a number of interest rate hikes in the US, and continued positive development in the growth data of the local economy. In recent months there has been a trend of moderation in the amount of credit card purchases Credit card purchases by private consumers fell 0.9% in real terms in October this year compared to the preceding month (seasonally adjusted data) Average rate of change since 2013 Total sales value of credit card purchases Base 2002=100, constant prices, seasonally adjusted data 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% Rates of change 3M/3M - right scale Credit card purchases index - left scale Analysis of the data over longer periods of time shows a decline in total credit card purchases in the last three months, this in continuation of the recent trend of moderation. Thus, in the period between August and October this year there was a decline of 0.9% (in annualized terms) compared to the preceding three-month period, this following 4.1% growth in the three-month period ending in September, and 6.2% growth in the three-month period ending in August. It should be noted that these rates of increase are below the multi-year average (see accompanying chart). This is to say, the data on total credit card purchases, which provide a certain indicator of private consumption activity in the economy, show a slight moderation in local demand recently. We note that a similar picture arises also from an analysis of the revenue data of retail chain stores and revenues data of the retail and wholesale trade sectors. The decline in August-October stems from a decline in purchases of manufactured goods (electronic goods, furniture, and clothing) against the backdrop of a relatively sharp decline in purchases of electronic goods, and from a decline in purchases of food and beverage products. On the other hand, moderate increases were registered in purchases of services (including insurance, flights, and entertainment, as well as municipal and government services) and other goods and services (including transportation, communication, energy, and more). 4

5 In summary, in recent months the amount of credit card purchases has moderated. Despite this, private consumption is expected to continue to be the primary stable growth driver of the economy; and consequently, credit card activity is likely to continue to expand also in the coming months. This comes in light of the current underlying macro-economic conditions, which are not expected to change anytime soon. These conditions include: an increase in the disposable income of a large portion of households, together with an improvement in their purchasing power against the backdrop of a decline in the unemployment rate to an historical low, a very low inflation environment, and near-zero interest rates. 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