- There was a recovery of economic activity in November and December following the exit from the second lockdown, but the variance of the adverse effect between the various industries continues, and the increase in morbidity led the government to announce a third lockdown. As of now, the restrictions are lighter than those imposed in the previous lockdowns. The direct weekly cost of the third lockdown in its current format, compared with a state of full economic activity, is estimated at about NIS 2.5 billion.
- The broad unemployment rate, which reached about 23 percent during the second lockdown, declined to about 12.7 percent in the first half of December, but is expected to again increase in view of the third lockdown. The impact on employment is greater in industries that are characterized by low wages.
- The Research Department’s forecast outlines two potential scenarios that are influenced by the pace of inoculation of the population. In the rapid inoculation scenario, GDP is expected to grow by 6.3 percent in 2021, and by 5.8 percent in 2022. In the slow inoculation scenario, growth is expected to be 3.5 percent in 2021 and 6 percent in 2022. In view of the fast pace of inoculations so far, it seems that the rapid inoculation scenario is more likely to come about than the slow inoculation scenario.
- The inflation environment remained low. The CPI for November declined by 0.2 percent, and inflation in the past 12 months is -0.6 percent (-0.2 percent net of energy, fruits and vegetables). One-year inflation expectations from the various sources remained below the lower bound of the target range. Forward expectations from the second year onward are within the target range.
- Since the previous interest rate decision, the shekel strengthened by 1.5 percent in terms of the effective exchange rate, by 2.8 percent against the US dollar, and by 0.6 percent against the euro. So far, it seems that exports are growing despite the appreciation, but at some point, the exchange rate may have a nonlinear effect on exports, and continued appreciation is expected to lead to a further slowing of inflation.
- The credit market continues to function with stable and low interest rates, supported by a variety of measures taken by the Bank of Israel and the Ministry of Finance. Bank credit to the business sector increased in recent months, and the increase in housing credit also continued. However, according to the Business Tendency Survey, the difficulty in raising credit remains higher than it was prior to the crisis, mainly among small businesses.
- The global economy is recovering, but there is continued uncertainty in view of the start of inoculation campaigns while morbidity continues to spread. A high level of variance is expected in the growth of various economies in 2021, and some countries are not expected to completely recover from the crisis even in 2022, mainly if there are further outbreaks of the virus and the pace of inoculations is slow. The monetary policies of the major central banks remains very accommodative.
The fast pace of the inoculation process in Israel increases the optimism regarding a rapid return of the economy to a path of growth in the coming year. However, the risks to economic activity remain high, and the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged. The Committee will therefore continue to utilize 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 it is necessary in order to achieve the monetary policy goals and to moderate the adverse economic impact resulting from the crisis.
For the file of figures accompanying this notice, clickhere.
Even before the economy managed to complete its exit process from the second lockdown, the increase in morbidity led the government to announce a third lockdown. As of now, the restrictions are looser than those imposed during the previous lockdowns. In particular, the education system continued its pre-lockdown activity routine. The Research Department’s assessment is that under the current circumstances, the direct weekly cost of the third lockdown compared with a state of full economic activity is about NIS 2.5 billion. The Knesset dispersed without passing the state budget for 2021. Alongside this, the earlier-than-expected start of the inoculation campaign and the rapid pace of vaccinations thus far in Israel are expected to support economic recovery later in the year.
The available indicators regarding economic activity in November and December show recovery of economic activity throughout the gradual exit from the second lockdown, but the variance of the impact between the industries continues. With the opening of street-front stores at the beginning of November, there was a jump in credit card purchases, and since then, the level has been slightly higher than it was prior to the crisis (Figure 3 in the attached data file). Mobility data indicate a return to activity at workplaces and markets. Goods exports (excluding ships, aircraft, and diamonds, in dollars) recovered, and were higher in October and November than they were prior to the crisis. Services exports (excluding tourism) continue to grow strongly (Figure 4). All components of goods imports (in dollars) also increased by high rates in November, to volumes slightly higher than they were prior to the crisis (Figure 5). The increase in the Current Account surplus continued in the third quarter, with an increase in the surplus in the services account and a reduction of the deficit in the goods account.
The broad unemployment rate, which reached approximately 23 percent during the second lockdown, decline to about 12.7 percent in the first half of December, but is expected to again increase in view of the third lockdown (Figure 7). The impact on employment was higher in the industries that are characterized by low wages (Figure 8). Central Bureau of Statistics real-time surveys indicate an increase in the volume of business closures in the economy. The rate of business closures increases the smaller they are, as does the rate of those dismissed from the business.
In view of the dispersal of the Knesset without passing the state budget for 2021, and in order to prevent large-scale cutbacks in government activity, the government increased the budget base for 2020 so that the interim budget in 2021 will be less restraining than was previously expected. The overall government deficit (excluding the provision of credit) at the end of 2020 is estimated at about 12 percent of GDP.
The Bank of Israel Research Department revised its macroeconomic forecast for the coming two years, and estimates that the contraction of GDP in 2020 will be about 3.7 percent (Figure 1). The revised forecast features two potential scenarios that are influenced by the pace of inoculation of the population. In view of the start of the inoculation campaign, both scenarios are more positive than the forecast published in October. In the rapid inoculation scenario, in which toward the end of the second quarter the government no longer places significant restrictions on economic activity for health reasons, GDP is expected to grow by 6.3 percent in 2021, and the broad unemployment rate is expected to decline during the year to 7.7 percent of the labor force in the fourth quarter of 2021. In 2022, GDP is expected to grow by 5.8 percent, the unemployment rate is expected to continue to decline to 5.4 percent, and the debt to GDP ratio is expected to be 75 percent. In the slower inoculation scenario, which will last until the middle of 2022, GDP is expected to grow by 3.5 percent in 2021, and the broad unemployment rate is expected to decline to about 11 percent. In 2022, GDP growth is expected to be 6 percent, while unemployment is expected to decline to 7 percent, and the debt to GDP ratio in 2022 is expected to be 82 percent. In view of the fast pace of inoculation, it seems that currently, the rapid inoculation scenario is significantly more likely to play out than the slow scenario.
The inflation environment remained low. The CPI for November decline by 0.2 percent, and inflation in the past 12 months was -0.6 percent (-0.2 percent net of energy and fruit and vegetables) (Figure 10). In the coming months, annual inflation is expected to remain negative. Inflation expectations for the coming year from the various sources increased slightly but remain below the lower bound of the target range. Expectations derived from the capital market continued to increase, partly in view of the increase in commodities and oil prices. Forward expectations from the second year onward remained virtually unchanged, and are within the target range. Medium- and long-term expectations remained anchored within the target range (Figure 13).
Since the previous interest rate decision, the shekel strengthened by 1.5 percent in terms of the nominal effective exchange rate, by 2.8 percent against the US dollar, and by 0.6 percent against the euro. So far, it seems that exports are growing despite the appreciation, but at some point, the exchange rate could have a nonlinear effect on exports, and continued appreciation is expected to lead to a further slowdown of inflation (Figure 14).
Home prices increased by 2.5 percent in the past year, while the pace of increase was more moderate in recent months. The volume of transactions in the housing market is lower than in the precrisis period, and there was a marked slowdown in building starts. The Banking Supervision Department directive cancelling the limitation on the Prime-linked component of mortgages is expected to lower the effective interest rate on such loans (Figure 21).
The credit market continues to function with stable and low interest rates, supported by a variety of measures taken by the Bank of Israel and the Ministry of Finance. However, according to the Business Tendency Survey, the difficulty in raising credit remains greater than it was prior to the crisis, mainly among small businesses (Figure 22). There was a marked slowdown in November in total loan repayment deferrals in the banking system. At the same time, the deferral period ended for about 60 percent of the total loans that were deferred in view of the crisis. There was a positive trend in the domestic capital market, as share indices in Tel Aviv increased, similar to the global trend, and corporate bond spreads continued to narrow.
The global economy is recovering, but the uncertainty continues in view of the start of inoculation campaigns while morbidity continues to spread. A high level of variance is expected in the growth of various economies in 2021, and some countries are not expected to completely recover from the crisis even in 2022, mainly if there are further outbreaks of the virus and the pace of inoculations is slow (Figure 25). The high morbidity levels have led to a slowdown in the services sector, mainly in Europe, while the improvements in manufacturing and in world trade continue. Share prices in the capital markets continued to increase in view of the start of inoculation campaigns, with slight increases in US treasury bond yields. The increases of oil and industrial commodity prices continue but inflation is expected to remain low and the monetary policies of the major central banks remain very accommodative. In the US, a fiscal incentive program was approved and the growth forecasts were revised upward, but private consumption and labor market data point to moderation in activity. In Europe, the increase in morbidity is expected to lead to a contraction of activity in the fourth quarter, and growth forecasts for 2021 declined again. The agreement between the European Union and the UK reduced the political uncertainty. In Japan, despite the increase in morbidity, real-time indicators point to improvement. The economic improvement in China continues in view of the improvement in consumer sentiment and the increase in demand for exports.
The minutes of the monetary discussions prior to this interest rate decision will be published on January 18, 2020. The next decision regarding the interest rate will be published at 16:00 on Monday, February 22, 2021.