Rapid decline in fiscal deficit improves fiscal credibility

ISRAEL - Report 13 Dec 2021 by Jonathan Katz

Highlights:

The fiscal deficit declines sharply
* In November, the fiscal deficit declined to 4.6% GDP LTM from 5.5%.
* Tax revenues are up 24% y/y this year while non-Covid spending is up only 2.3%. We expect a low fiscal deficit of 2.7% in 2022.

FX: The shekel appreciated by 1.7% last week against the basket.
* The shekel/basket has returned to its strongest levels, from mid-November.
* In November, the BoI purchased 4.0bn USD in order to stem the strong pressure for shekel appreciation.
* Israeli institutions were net sellers of 0.8bn USD in October and 21bn YTD.

The number of employed surged in November
* The number of employed increased by 145k in the 1st half of November.
* The employment ratio (to ages 15+) increased to 60%, approaching 61% pre-Covid.
* Broad unemployment declined to 6.7% in the 1st half of November from 7.3% in the second half of October.
* Rapid labor market improvement complicates the BoI position of “lower for longer”.

The CBS business survey points to steady economic growth and optimism.

In November, consumer confidence (CB) declined on Omicron concerns while the Poalim index improved slightly.

Bonds: The BoI purchased 3.4bn ILS in government bonds in November, and a total of 83.5bn out of the 85bn program, which will not be extended.

Monetary policy: The last rate hold decision was unanimous, with the hawk Professor Grunau having left and Professor Feldman replacing him. The MPC noted that those countries that have tightened have inflation much higher than Israel's. The MPC expressed concern regarding the slow pace of recovery in the labor market and noted that wage pressure has been fairly weak so far. We expect the first rate hike in Q322.

Important data this week: Monday: Trade data from November; Tuesday: Balance of payments (Q321); Wednesday: November’s CPI: We expect minus 0.1% m/m, at the low end of consensus, which is closer to zero. Thursday: Residential starts and completions (Q321), and the second estimate for Q321 GDP growth.

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