Despite high inflation in May, rates to remain on hold
Highlights:
Inflation in May reached 0.7% m/m (1.5% y/y).
- The market was expecting 0.4%-0.6% (Leader: 0.6%).
- The CPI was impacted by a strong seasonal jump in fresh produce and clothing prices.
- Core inflation ticked higher, to 1.0% y/y from 0.8% last month.
Trade data suggest some growth deceleration in Q2 2019.
- Exports in April-May are down 31% annual compared to Q1 2019.
- Imports have declined, including consumer goods and raw materials.
- The trade deficit is up 22% (average April-May/Q1 2019).
The CBS consumer confidence index declined 2 points in May.
New home sales are down 19.5% saar in February-April.
- Both of these trends could be due in part to political uncertainty.
GDP growth in Q1 2019 was revised to 4.8% saar from 5.2%.
Inflation forecast: We expect inflation to reach 1.2% in the next 12 months, as we assume a slightly weaker shekel towards year-end (political instability), and more tax hikes in early 2020 due to the expanding fiscal deficit. As a result, we are assuming an impact of 0.4% on inflation in Q1 2020 (including VAT by 1%). Housing rentals will continue to increase at the present 2.5% pace on the back of wage pressure. On the other hand, lower global commodity prices will moderate inflation.
Fiscal policy: The government is proposing a small fiscal adjustment of 3.25bn ILS in order to prevent the deficit from reaching 4% of GDP this year, including a flat expenditure cut and taxation on insurance companies.
Monetary policy: We continue to expect rate stability this year (despite the higher-than-expected inflation print in May). Inflation is expected to decline to 1.2% y/y in June (from 1.5% in May). More crucial will be the emphasis on the global downside risks and the strong shekel, of course.
Politics: Elections are still three months away, but Lieberman (right wing and secular) is pushing for a unity government (Blue and White with Likud), without the religious parties. As long as Netanyahu is heading the Likud party, this appears unlikely.
Important data this week: Today: Current account for Q1 2019; we expect a surplus of 2.5-3bn USD, somewhat lower than Q4 2018 but similar to average 2018 at 3% GDP. Thursday: Residential starts/completions for Q1 2019 and job vacancies (May).
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