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Transcript
Leumi Economic Weekly February 25, 2009 The composite state-of-the-economy index continues its substantial downward trend The composite state-of-the-economy index (also known as the S-index), published monthly by the Bank of Israel (BoI), fell 1.2% m/m in January, reflecting an acceleration in the continued downward movement in the index that has been evident for six months already. One indication of the severe deterioration in January's index figure was the fact that most components of the index fell, in particular proceeds in the trade and services sectors. The state of the economy "S" index Month-on-month rate of change 1.5 % m/m 1.0 0.5 -0.5 -1.0 01 /0 6 04 /0 6 07 /0 6 10 /0 6 01 /0 7 04 /0 7 07 /0 7 10 /0 7 01 /0 8 04 /0 8 07 /0 8 10 /0 8 01 /0 9 -1.5 According to the BoI, this is another sign of the Israeli economy's slide into recession, which has been evident since the fourth quarter of 2008 (additional details on this issue is presented below in regard to the decline in Israel's GDP in the last quarter of 2008). The slide of economic activity in Israel into recession can be strongly linked to the substantial deterioration in the financial and economic positions of Israel's main trading partners. Alongside these external factors, it is also important to point out the public's concerns regarding a severe economic slowdown. These concerns on the part of the public are being reflected in a slowdown in the expansion of private consumption. This is the result of both a substantial decline in the public's portfolio of financial assets, and also as a result of a weakening in business confidence. Israel's GDP shrank in the fourth quarter of 2008 Israel's GDP contracted 0.5% in the fourth quarter of 2008 compared to the preceding quarter (in annualized terms and excluding seasonality). The decline in economic activity is even more noticeable in data on Israel's business sector product, which fell 1.2% during the final quarter of 2008. BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION The Economics Sector, P.O.Box 2, Tel Aviv 61000 Ph: 972-3-514-8737, Fax: 972-3-5147375, e-mail: [email protected] http://english.leumi.co.il/Home/ The fall in the GDP in the final quarter of 2008, together with additional indicators clearly signals in our opinion the Israeli economy's slide into recession. This process can be seen in almost all components of economic activity within the private sector. Thus there was a decline registered in the following central components of economic activity: private consumption per capita (-5.4%); investment in the economy (-1.8%); and exports (-21.4%). Looking forward to all of 2009, the year is expected to be characterized by a decline in the business sector product. A slide into recession 2006 war % 12 10 8 6 4 2 0 -2 -4 GDP: total and business sector quarter-on-quater rate of change, annualized terms and seasonally adjusted I-III IV- VII- X- I-III IV- VII- X- I-III IV- VII- XVI IX XII VI IX XII VI IX XII 2006 2007 Business sector 2008 Total GDP The BoI has slowed its rate of interest cuts, as the bank comes to the end of this process and moves towards implementing "non-conventional" instruments Against the backdrop of the substantial decline in economic activity, on February 23 the BoI announced a 25bps cut to its interest rate for March, bringing the rate to only 0.75%. In contrast to the interest rate cuts implemented since October 2008, which were in increments of 50-75bs each, the current move was of a more moderate rate. This is signaling that the central bank is approaching the end of "conventional" steps in the process of monetary expansion. Now, while on one hand the process of cutting interest rates in the economy comes to its conclusion, yet on the other hand the economy remains weak and there exist concerns regarding a potential slide into deflation, the BoI needs to continue to expand the money supply in the economy, and thus will begin to implement "non-conventional" policy instruments. Within this framework the BoI will implement tools for the purpose of injecting money into the economy with the hope that this action will ultimately contribute towards achieving a number of targets including: increasing local demand and helping real economic activity to recover, and also facilitating the return of inflation from its current negative environment to within the price stability target range of 1-3%. These policy tools include the purchase of government bonds on the secondary market, loan tenders and monetary deposits, creating net redemptions of T-bills (Makams), repurchase agreements (repos), foreign currency purchases, and more. The drop in the BoI interest rate to such a low level in nominal terms, together with the impact of substantial and consistent monetary expansion that is in turn raising inflation expectations (sooner or later), will lead to an additional slide in the interest rate of the BoI in real terms. We note that the BoI interest rate in real terms has not been in negative territory 2 _________________________________________________________________ BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION since the beginning of the 1990s, when the economy was still experiencing double-digit inflation. In other words, the coming monetary processes represent a significant challenge for Israel's policy makers as they attempt to navigate the economy under conditions different from those they have known over the last decade. Our hope is that this process will turn out well, both in terms of achieving the goals mentioned above, and also in terms of bringing about a "smooth" return to "conventional" policies when the conditions allow for it. That is to say, the policy makers need to will also need to avoid continued monetary expansion that is too quick, which would be reflected in an upward deviation from the price stability target in the coming years (in 2010 and onwards). The short term real interest rate in the US and in Israel 10 07. 01 20 07. 0 200 4 7 .0 200 7 7. 1 200 0 8. 0 200 1 8. 0 200 4 8. 0 200 7 8. 1 0 20 09. 01 07 20 06. 20 06. 1 04 06. 0 7 4 US 20 6. 0 200 5. 1 200 5. 0 200 5. 0 200 200 5 .0 1 Israel 20 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% The real interest rate=the central bank rate less inflation expected for the next 12 months Author: Dr. Gil Bufman The data, information, opinions and forecasts published in this publication (the “Information”) are furnished as a service to the readers and do not necessarily reflect the official position of the Bank. The above should not be seen as a recommendation and should not replace the independent discretion of the reader, nor should it be considered an offer or invitation to receive offers or advice – whether in general or in consideration of the particular data and requirements of the reader – to purchase and /or to effect investments and/or operations or transactions of any kind. The Information may contain errors and is subject to changes in the market and to other changes. Likewise, significant discrepancies may arise between the forecasts contained in this booklet and actual results. The Bank does not undertake to provide the readers with notice, in advance or in retrospect, of any of the aforementioned changes by any means whatsoever. The Bank and/or its subsidiaries and/or its affiliates and/or the parties controlling and/or parties having an interest in any of them may, from time to time, have an interest in the information represented in the publication, including in the financial assets represented therein. 3 _________________________________________________________________ BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION