- The second wave of the Covid-19 pandemic continues to leave its mark on the economy, and there is a two-way feedback loop between the economic business cycle and the morbidity cycle.
- According to the National Accounts data, second quarter GDP was approximately 11 percent lower than what would have been expected without the crisis. The main negative impact has been on domestic activity—private consumption and investment—as the negative impact on exports has been more moderate, while a mitigating factor was the increase in public consumption. Real time indicators of activity show that after the relatively rapid recovery of economic activity in June, the pace of recovery has slowed in July and August. Labor market weakness continued, with the “broad unemployment rate” at 12 percent.
- The Research Department’s staff forecast describes 2 possible scenarios. In the relatively optimistic scenario, in which control of the spread of the virus is maintained, GDP is expected to contract by 4.5 percent in 2020 and to grow by 6 percent in 2021. In the more severe scenario, in which there is only partial control of the pandemic, accompanied by a further deterioration in the global situation, negative growth of 7 percent is expected in 2020 and growth of only 3 percent in 2021.The debt to GDP ratio in 2021 is expected to be 78 percent in the optimistic scenario and 87 percent under the pessimistic scenario.
- The global economy contracted sharply in the second quarter of the year. Forecasts by investment houses expect positive growth in the second half of the year, but for the full year of 2020 a marked contraction in GDP is expected in most economies. The removal of closures and reduction in social distancing enacted in many countries led to partial economic recovery. Central banks in advanced economies continue to implement the special monetary measures they announced in response to the crisis.
- Financial markets remain stable. An improvement is apparent in the credit market’s functioning, with stability in interest rates, supported by the Bank of Israel's measures and the government-guaranteed credit funds. Government bond yields remain low, and Bank of Israel activity in the corporate bond market contributed to a notable decline in spreads. The equity market rose.
- Since the previous interest rate decision, the shekel weakened by 0.6 percent in terms of the nominal effective exchange rate, against the background of depreciation against the euro, but strengthened by 1.1 percent against the dollar. The exchange rate is weighing on the recovery of exports, particularly in view of the decline in global demand, and on the return of the inflation to the target.
- The inflation environment remained low. The inflation rate in the past 12 months was -0.6 percent. Inflation expectations for the coming year, from all sources, remained below the lower bound of the target range, while forward expectations of inflation at the end of the second year are slightly below the lower bound of the target range, and longer-term expectations are anchored within the target range.
In view of the magnitude of the crisis’s adverse impact on economic activity, the Committee continues to implement a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets. The Committee will expand the use of the existing tools, including the interest rate tool, and will operate additional ones, to the extent that it assesses that the crisis is lengthening and that it is necessary in order to achieve the monetary policy goals and to moderate the negative economic impact created as a result of the crisis.
For the file of figures accompanying this notice, click here.
The second wave of the Covid-19 pandemic continues to leave its mark on the economy, and there is a two-way feedback loop between the economic business cycle and the morbidity cycle. An increase in economic activity causes an increase in morbidity, which in turn leads to social distancing measures, which lower the rate of morbidity and allow a gradual return of economic activity, in a cycle that repeats itself. Economic activity remains moderated, and an analysis of developments shows that the impact of the crisis on demand in the economy is more severe than its impact on supply.
According to the first estimate of National Accounts data for the second quarter of 2020 (Figure 1 in the attached data file), GDP contracted by 28.7 percent (in annual terms), and its level is about 11 percent lower than what would have been expected without the crisis. The main adverse impact is on domestic activity—private consumption and investment, particularly investment in residential construction—while the impact on exports is slightly more moderate. There was an increase in public consumption, in view of the response of government policy to the crisis. An analysis of the real time indicators of activity shows that after the relatively rapid recovery in June, there was a slowing in the pace of recovery in July and August. The level of credit card purchases in July was lower than the baseline based on data from previous years, but since the beginning of August, there has been an increase in purchases, and as of mid-August, the level is higher than the baseline level (Figure 3). Of particular note have been the increases in credit card expenditure in the restaurant industry and the education and leisure services industry, which until recent weeks had typically been stable at low activity levels, while tourism remains very low. The indices of mobility to workplaces moderated in July to about 20–30 percent below their pre-crisis level, but at the beginning of August, there was an increase in mobility to places of retail and recreation, and leisure (Figure 4). The findings of the most recent real-time survey conducted by the Central Bureau of Statistics, at the beginning of July, show a worsening of the adverse impact to business revenue and the share of workers who are employed (Figures 8–9). Uncertainty regarding the ways to deal with the health situation, as well as uncertainty regarding the date on which the budget for 2021will be approved are liable to have a negative impact on continued economic recovery.
Despite the difficulty in precisely assessing the state of the labor market in view of the variance in data from various sources, all the data still indicate significant weakness. According to data published by the Central Bureau of Statistics Labor Force Survey, the “broad unemployment rate”, which includes the unemployed, those temporarily absent from work for reasons related to the Covid-19 crisis, and those dismissed from their positions between March and July who are not looking for work, is about 12 percent (for those aged 15 and above).
The Research Department updated its macroeconomic forecast, to reflect two possible scenarios. In the relatively optimistic scenario, in which there is control over the pandemic, GDP is expected to contract by 4.5 percent in 2020, and the “broad unemployment rate” is forecast to be 11.5 percent. In comparison, in a more severe scenario where only partial control of the pandemic is achieved and there is a further worsening of the situation globally, the forecast expects a contraction of 7 percent and an unemployment rate of 13.6 percent. In the first scenario, GDP is expected to grow by 6 percent in 2021, compared with 3 percent in the more serious scenario. Under the optimistic scenario, the deficit is expected to be 13.2 percent in 2020 and 8.2 percent in 2021, and the debt to GDP ratio is expected to be 75 percent in 2020 and 78 percent in 2021. In the pessimistic scenario, the deficit is expected to be 14.6 percent in 2020 and 12 percent in 2021, and the debt to GDP ratio is expected to be 78 percent in 2020 and 87 percent in 2021.
The inflation environment remained low. The CPI for June declined by 0.1 percent, while the CPI for July increased by 0.2 percent. Inflation over the past 12 months was -0.6 percent, compared with -1.6 percent in the previous month (Figure 11). The increase in fuel prices made a significant contribution to the increase in annual inflation, by reducing the negative contribution of the energy component in the CPI. The CPI excluding energy, fruit and vegetables showed an inflation rate of -0.4 percent, similar to the level in the previous two months (Figure 12). An analysis by the Research Department shows that adjusting the household consumption basket to reflect changes in consumption patterns due to the crisis results in annual inflation being only about 0.2 percent higher than the official inflation rate. Inflation expectations for the coming year, from all sources, remained below the lower bound of the target range. In the coming months, the annual inflation rate is expected to remain negative. Medium-term forward inflation expectations have increased, such that inflation expectations at the end of the second year are slightly below the lower bound of the inflation target, and longer-term expectations are anchored within the target range.
Since the previous interest rate decision, the shekel weakened by 0.6 percent in terms of the nominal effective exchange rate, against the background of depreciation against the euro, but strengthened by 1.1 percent against the dollar. The exchange rate is weighing on the recovery of exports, particularly in view of the decline in global demand, and on the return of the inflation to the target.
Financial markets remain stable. An improvement is apparent in the credit market’s functioning, with stability in interest rates, supported by Bank of Israel measures and the government-guaranteed credit funds (Figures 22–23). Government bond yields remain low, and Bank of Israel intervention in the corporate bond market, which began in July, contributed to a notable decline in spreads on the main Tel Bond indices (Figures 18–19). The equity market was characterized by price increases in line with the global trend.
The pace of increase in home and rental prices moderated. Home prices increased in May–June by 0.4 percent following a decline of 0.8 percent in April–May, and the annual rate of increase moderated markedly, from an annual rate of more than 3 percent in the months prior to March–April to an annual rate of 1.9 percent. The increase in rental prices also moderated to 1.2 percent.
The global economy contracted sharply in the second quarter of the year, as a result of the pandemic and social distancing measures. Investment houses expect positive growth in the second half of the year, but it will be weaker than the contraction that has taken place, and will provide only a “partial correction” to the data from the first half of the year, so that, other than China, GDP is expected to contract significantly in all of the major economies in 2020 (Figure 24). The removal of closures and reduction in social distancing enacted in many countries led to some recovery, but the economy is far from having returned to its pre-crisis activity levels. Evidence of some improvement in the state of the world economy can be found in the global Purchasing Managers Index, which returned in July to the range reflecting growth at a rate similar to the long-term pace (Figure 26).
The global inflation environment remained low and far from the central banks’ target rates. In particular, oil prices are significantly lower than they were a year ago (Figure 28), but core inflation in the main economies is also low. The global monetary environment remains very accommodative. Central banks in the advanced economies continue to implement the special measures announced in view of the crisis, and some of the central banks in emerging economies, where the monetary interest rate is high, are continuing to lower their interest rates.
The minutes of the monetary discussions prior to this interest rate decision will be published on September 9, 2020. The next decision regarding the interest rate will be published at 16:00 on Thursday, October 22, 2020, and will be followed by a press briefing with the Governor.