v The various indicators regarding the period prior to the recent worsening of morbidity showed that the level of activity had returned to its long-term trend in most industries, but activity was still below the trend in the vulnerable in-person industries.
v GDP grew in the second quarter by a high annualized rate of 15.4 percent. In addition, the Central Bureau of Statistics revised historical GDP data upward. This combination led to an output gap in the second quarter of about 3 percent, lower than the previous assessment, which was 4.5 percent.
v Labor market data continue to return toward their precrisis levels. The number of job vacancies continued to increase, continuing to the trend since the beginning of the year, and the employee hiring constraint reported by firms continues to weigh on the expansion of activity. However, the ratio of unemployed persons to the number of job vacancies varies markedly among the geographic regions in Israel
v The upward trend of inflation continues. Inflation in the past 12 months is 1.9 percent. Inflation expectations for the coming year are within the target range, and declined slightly. Expectations derived from the capital market, and those of inflation contracts, are at the midpoint of the target range, while those of inflation forecasters are lower. Medium- and long-term inflation expectations from the capital markets remained anchored at the midpoint of the target range.
v Since the previous interest rate decision, the shekel strengthened by 0.6 percent against the US dollar, by 1.5 percent in terms of the effective exchange rate, and by 2.2 percent against the euro.
v Home prices increased rapidly, by 7.6 percent, in the past 12 months. Alongside this, the pace of rental price increases remained relatively moderate.
The Israeli economy’s process of recovery from the crisis continues. However, there are still challenges to economic activity in view of the increased health risks in Israel and abroad. The Committee will therefore continue to conduct a very accommodative monetary policy for a prolonged time, using a range of tools as necessary, including the interest rate tool, in order to continue supporting the attainment of the policy targets and the recovery of the economy from the crisis, and to ensure the continued orderly functioning of the financial markets.
For the file of figures accompanying this notice, click here.
Since the previous monetary policy decision, there has been a significant increase in morbidity due to the spread of the “Delta variant” of the COVID-19 virus. In particular, there has been an increase in the number of seriously ill patients. These have led to government decisions to tighten limitations placed on economic activity: “Green Badge” and “Purple Badge” regulations have been reimposed in most industries, and the restrictions on those returning from abroad have been tightened. Alongside this, the third vaccination process is underway. The vaccination process is expected to help lower serious morbidity, and thereby lead to a reduction in the expected impact on the economy. However, the increase in morbidity, the pace of decline in the effect of the vaccination, and the ramifications thereof, have added a large measure of uncertainty regarding economic activity in the short and medium terms.
Most of the recently published data reflect the accelerated economic recovery prior to the significant worsening of morbidity. The indicators regarding activity continue to show that the level of activity had returned to its long-term trend in most industries, but was lower than the trend in the vulnerable in-person industries, particularly tourism, hospitality, and culture. The average of credit card purchases in July-August was around the long-term trend (Figure 6), but the level of purchases in the tourism and restaurant industries is low (Figure 7). According to the Central Bureau of Statistics Business Tendency Survey, the aggregate net balance of the business sector continued to increase in July, and was at its highest level since the outbreak of the COVID-19 crisis (Figure 4). Goods exports (excluding ships, aircraft, and diamonds, in dollars) are higher than they were prior to the crisis, and services exports continue to increase very rapidly. Total capital raised by private companies in the high-tech sector since the beginning of the year has already surpassed $15 billion, compared with about $10 billion in all of 2020 (Figure 22). Goods imports are high in all components.
According to the first estimate of National Accounts data for the second quarter, GDP grew by a high annual rate of about 15.4 percent (Figure 1). Private consumption grew sharply by 36.3 percent, exports (excluding diamonds and startups) increased by 14 percent, and investment increased by 9.3 percent due to increases in industrial investment and in residential construction investment. The sharp increase in uses is also reflected in imports (excluding defense, ships and aircraft, and diamonds), which grew by 17.6 percent (Figure 2). In addition, first quarter growth was revised upward.
In addition, according to a Central Bureau of Statistics revision of historical GDP data, nominal GDP in 2020 was about one percent higher than previous publications stated, and the historical growth rates prior to the crisis, from which the potential growth rate is derived, were higher than previous assessments. Even so, according to an analysis by the Bank of Israel Research Department, the combination of these corrections leads to an output gap of about 3 percent in the second quarter of 2021, lower than the previous assessment of 4.5 percent (Figure 3).
Labor market data are continuing their trend of return to the precrisis situation. Labor Force Survey data for July indicate a decline in the broad unemployment rate to a monthly average of 8.4 percent, and even lower in the second half of the month. (Figure 10). Since the exit from the third lockdown, there has also been an increase in the adjusted employment rate (according to which COVID-19 absentees are not considered employed; ages 15+), to 58.4 percent in July, while in 2019, prior to the crisis, the rate was about 61 percent (Figure 11). The number of employed persons aged 15+ in July was about 185,000 lower than the number of employees required to attain the 2019 average employment rate. The number of job vacancies continued to increase, further to the trend since the beginning of the year (Figure 12), and according to the Business Tendency Survey, the employee hiring constraint continues to weigh on the expansion of activity, particularly in the hotels, manufacturing (professional employees), and services industries (Figure 14). However, the ratio of unemployed persons to the number of job vacancies varies markedly among the geographic regions in Israel (Figure 13).
The upward trend in inflation continued. The CPI increased by 0.4 percent in July, and inflation in the past 12 months is 1.9 percent (1.7 percent net of energy and fruits and vegetables; Figure 17). Inflation in the nontradable components continues to increase, led by items that were impacted by the opening of the economy. The increase in the prices of tradable goods was stable (Figure 18). The price increases encompass a greater number of components in the CPI. Inflation expectations for the coming year are within the target range, and declined slightly. Expectations derived from the capital market and from inflation contracts are at the midpoint of the target range, while those of professional forecasters are lower (Figure 19). Medium- and long-term expectations remain anchored at the midpoint of the target range (Figure 20). The Monetary Committee is closely following these developments, and its assessment is that there is no concern of an inflationary outbreak.
Since the previous interest rate decision, the shekel strengthened by 0.6 percent against the US dollar, by 1.5 percent in terms of the effective exchange rate, and by 2.2 percent against the euro (Figure 21).
Home prices increased by 7.6 percent in the past 12 months (Figure 26), a more rapid pace than in previous years, in view of the moderation in the number of building starts and in the number of building completions in the past year. The increase in housing prices in recent months has been accompanied by an increase in the prices of construction inputs. Total transactions in May remained high. In the past year, investors sold dwellings at a volume similar to their purchases, after having been net sellers in previous years. Alongside this, the pace of rental price increases remained relatively moderate. The volume of new mortgages taken out in July was similar to the record set in June, further to the high mortgage volumes since the beginning of the year (Figure 27).
In the capital market, the Tel Aviv 125 index increased slightly relative to parallel indices abroad, and corporate bond spreads increased slightly but remained very low (Figure 25). Government bond yields declined slightly, mainly in the long portions, similar to the global trend. The credit market continues to function well, with stable and low interest rates (Figures 29 and 30). According to the Central Bureau of Statistics Business Tendency Survey, reported financing difficulties among businesses of various sizes are returning to levels similar to those that were prevalent prior to the crisis (Figure 28).
The recovery in the global economy continues, but there is growing concern that the “Delta variant” will lead to an increase in morbidity and a return of restrictions, and will thereby lead to a slowdown in activity and deepening difficulties in the global production chain. GDP data for the second quarter indicated continued global recovery, led by the advanced blocs, chiefly the United States. The IMF’s global growth forecast for 2021 remained unchanged at 6 percent (Figure 31). However, according to the IMF, a significant spread of morbidity in the world will delete about 0.8 percent from global growth in both 2021 and 2022. The global purchasing managers indices for July continue to indicate economic expansion (Figure 33). The volume of world trade is at high levels of activity. Equity indices in the US and Europe continued to increase, while in contrast, equity indices in the emerging countries and in east Asia declined in view of the increase in morbidity, movement restrictions, and regulatory changes in China. Oil prices declined and commodity prices increased. Oil is trading at close to its precrisis price, but its price is still about 40 percent higher than it was 12 months, so that it is still expected to support inflation in the coming months. The global inflation environment continues to increase (Figure 34), but according to most assessments, a significant portion of the increase is not expected to persist (Figure 35). The US economy grew by 6.5 percent in the second quarter compared to the previous quarter in annualized terms. Sentiment data continue to indicate expansion, and July employment figures were better than expected. In the eurozone, GDP grew by about 8.2 percent in annual terms compared to the previous quarter, following two quarters of contraction. In China, GDP grew by about 5.3 percent in annual terms compared to the previous quarter—lower than the average in the precrisis years. In addition, activity data indicate a slowdown in the pace of activity. Monetary policy in the major economies remained very accommodative. The major central banks left their interest rates unchanged and did not change their purchase programs. However, the Fed emphasized progress in attaining the goals of the accommodative monetary policy, and it will consider the continuation of that policy at its coming meetings. Furthermore, there were interest rate increases in a number of developing economies in which there are significant inflationary pressures.
The minutes of the monetary discussions prior to this interest rate decision will be published on September 6, 2021. The next decision regarding the interest rate will be published at 16:00 on Thursday, October 7, 2021, followed by a press briefing by the Governor.