Download Economic Review - Leumi International

Economic Review
4th Quarter 2010 No. 23
A large surplus in the current
account of the balance of
payments
The surplus in the current
account of Israel’s balance
of payments amounted to
US$4bn in the first half of 2010, similar to the level
from the second half of 2009. In this period the
deficit in the foreign goods account increased,
primarily as a result of a rise in expenditures on
the import of fuel and diamonds, while the surplus
in the services account widened, primarily as a
result of the rise in the export of transportation
services (cargo transport between foreign ports
by Israeli shippers abroad). When analyzing the
trend in recent years of the current account in
terms of GDP, which is the recognized method for
comparing the balance of payments of countries,
in Israel there is an increase in the surplus, as can
be seen in the accompanying graph.
This surplus, which is expected to amount to 3.8%
of GDP in 2010, is one of the factors supporting
the strength of the shekel and its basic tendency
towards appreciation. In addition, there is a
surplus of Israeli-held assets over liabilities in
overseas debt instruments, in the amount of
US$50bn. If we broaden the scope to include not
only overseas debt obligations, but also the stock
component, then the amount of overseas assets
and liabilities of the Israeli economy indicated
also at the end of the second quarter a surplus
of assets held by Israelis over overseas debts, in
the amount of US$1.2bn. These data, which show
that Israel continues to be a lender to the world,
and not a borrower as was the case for many
years, also reduce the risks that can come about
from a weakening of the shekel, and thus support
as well a strengthening in the local currency.
A decline in the export and import of goods in
August
In August there was a decline in both exports and
imports of goods, compared to July (excluding
seasonality). The decline was registered in all
central components of imports, as well as in
industrial exports, which is the central component
of the export of goods. Is this widespread change
significant? In our opinion it is important to
wait and to be cautious about jumping
to conclusions, especially in light of past
experiences in which there were cases when
there were substantial revisions of previous
monthly data. However, when analyzing
the long-term trend of surplus/deficit
developments in the foreign trade “basic”
goods account (which is the goods account
excluding ships, aircraft, fuel and diamonds)
it appears Israel is still in surplus, after many
years of a deficit, see graph. The improving
trend in this “basic” account contributes
to the surplus in the current account of
the balance of payments, upon which we
commented at the beginning of this review.
By: Eyal Raz, Economics Sector, Leumi Israel
The diversion within
the Eurozone seems
to gain in amplitude:
Germany is steaming
ahead, growing by
2.2% in 2Q, whereas
fiscally challenged countries barely expand
or even stay in recession, such as trouble
spot Greece. This striking dichotomy is
explained by the difference in economic
activities among these countries, their
competitiveness on the world market and,
of course, the fiscal crisis that plagued
Southern European countries the most. As
the Eurozone remained highly dependent on
the re-stocking cycle, which occurred later
than in other economic zones and benefited
partially also from the weak EUR, there is a
high probability of a significant slowdown in
the euro area in 2H of this year, even more so
as export champion Germany additionally
benefited from a weather-induced bounce
in construction in 2Q. Leading indicators are
already signaling a slowdown in the euro
area, not only in manufacturing, but also in
services. The level of the composite PMI is
consistent with sharp decelerating expansion
in 3Q. Industrial orders point to softer activity
as well, reacting to lower global economic
activity in recent months, which undermines
exports. Encouragingly, household final
consumption expenditures increased by 0.5 %
in 2Q, a rare occurrence in many years. For
Germany continuing to represent the engine
of Europe, the success of replacing overseas
with, so far muted, domestic consumption
is crucial. The relatively elevated level of
Germany’s IFO (a widely watched sentiment
indicator, measuring business sentiment in
Germany) business climate index points to
friendlier investment activity.
On the private consumption side, an
improved labor market, also as a result of less
short-term work, and seemingly future wage
increases may indeed lead to somewhat
more solid spending. The constantly criticized
German consumer behavior finally has the
potential to contribute more to Eurozone
growth. Household expenditures in the
rest of Europe look much less promising.
Unemployment in many countries will remain
stubbornly elevated or even rise further.
Painful structural reforms, the removal of
stimulus and impending fiscal squeeze
overshadow the economy. Very importantly,
the pace of fiscal adjustments differs in timing
and magnitude and the impact will only be
visible with a lag. We expect very sluggish
economic growth for at least the next two
years.
Spain’s prime minister optimistically claims
that the European debt crisis is over. We
disagree. Record CDS spreads underline that
risks for Ireland, Portugal and Greece are
acute. As long as Europe lacks the courage
to fundamentally change its fiscal policy
mechanism, the EMU will be questioned
and system-threatening events can reoccur.
Additionally, the European banking stress
test showed serious lack of depth, impacting
the credibility of European authorities. It is
an open secret that a significant number of
Eurozone banks still need support from the
ECB and appear unable to find alternative
sources of funds. The ECB will continue to
match in full banks’ demands for weekly and
monthly liquidity at the prevailing main policy
interest rate. We expect the ECB interest rates
to remain firmly on hold - also in 2011.
By: Esther Meier, Leumi Asset Management, Leumi Switzerland
No "Great
Expectations"
Many literary scholars
consider the above
captioned
Charles
Dickens
novel
a
masterpiece that epitomizes the story of
upward mobility; the rise from poverty to
wealth. Unfortunately this is not the story
currently being written about the U.S.
economy in the policy statements released
at the conclusion of each Federal Reserve
FOMC meeting. The progression of recent
statements reveals a Fed with "minimum
expectations" regarding the near to medium
term outlook for the economy, job growth,
housing, incomes and inflation.
Earlier in the year, Fed statements portrayed
a cautious yet upbeat tone following strong
4th Qtr. '09 and 1st Qtr.'10 economic growth.
This changed in June following the Greek
crises in particular, the PIIGS in general and
a broad retrenchment in the U.S. economy.
The June 23 statement was a downgrade in
the outlook due to "...high unemployment,
modest income growth, lower housing
wealth, and tight credit." It also said "...
financial conditions have become less
supportive" and "...underlying inflation has
trended lower." In the next several days;
ten-year treasury rates dropped 25 bps to
2.90%; the EUR rose against the USD from 1.23
to above 1.25; and the S&P 500 fell 7.5% to
1010.
At the August 10 meeting they said "...the
pace of economic recovery is likely to be
more modest in the near term than had
been anticipated." But the most significant
part of the statement was designed to calm
the markets apprehension over a potential
shrinking of the Fed's $2.35 trillion balance
sheet (compared with about $900 million
pre-crises). To avoid such a contraction
the Fed, for the first time, said they will keep
constant their holdings of securities at the
current level by reinvesting agency debt
and agency mortgage-backed security
The information in this newsletter is based on sources, including published sources
,which Bank Leumi le-Israel B.M and its subsidiaries believe to be reliable but which the
Bank has not independently verified. The Bank makes no guarantee, representation
or warranty as to the information’s accuracy or completeness.The opinions expressed
in this newsletter are subject to change with no notice.
The information in this newsletter should not be construed to buy or sell, or the solicitation
of an offer to buy or sell any securities or currencies. The Bank and its affiliates may
have positions in the securities or currencies referred to in the newsletter, or in other
securities or currencies whose value may be affected by the value of securities or
currencies, referred to in the newsletter. Nondeposit investment products are not
insured by the FDIC; are not deposits or other obligations of, or guaranteed by, the
Bank or its affiliates; and are subject to investment risks, including possible loss of the
principal amount invested.
maturities back into longer-term Treasuries.
By identifying balance sheet size as a policy
factor, participants gained an added
degree of transparency into Fed operations
and thinking. Had the Fed allowed the
balance sheet to contract, it would signal
the gradual withdrawal of the quantitative
easing undertaken during the depths
of the financial crises. By the time of the
August meeting 10-year government yields
had fallen to 2.75% and subsequently fell to
2.45%. The USD had weakened substantially
against the EUR to 1.32 by the meeting date
but subsequently strengthened through
month end with the EUR falling to 1.26 on
concern over Euro area growth prospects.
The S&P, meanwhile, had rallied 12% from
the early July lows all the way back to 1130
by August 10 but then fell 7.0% to 1050 on
the Feds poor economic outlook and the
stronger USD.
At the recent September 21 FOMC meeting,
the Fed communicated for the first time an
unease over what they believe to be a
growing deflation risk. They said "Measures
of underlying inflation are currently at levels
somewhat below those the Committee
judges most consistent, over the longer
run, with its mandate to promote maximum
employment and price stability.
They
added that "... inflation is likely to remain
subdued for some time before rising to levels
the Committee considers consistent with
its mandate." Ten-year rates now remain
pegged at 2.50%, the EUR has rallied 9.0%
to 1.375 and the S&P has maintained an
1120-1150 range. Gold has reached an all
time record high of $1320.
To this writer, who has observed the Fed
for almost thirty-five years, the September
21 statement is an almost unimaginable
development. As you may recall, the
late seventies/early eighties saw inflation
balloon following the "guns and butter"
policies of the Vietnam War and "Great
Society" programs. In addition, skyrocketing
energy prices following the early 70's Arab
oil embargos fanned inflation ever higher.
To combat this, President Carter appointed
Paul Volker as Fed Chairman in 1979
Volker vowed to crush inflation.
He
instituted a policy that targeted the money
supply instead of the level of the Fed Funds
rate and in doing so caused rates to rise
to 20% in 1981. This brought the economy
to its knees and caused the only (post
WWII) "double-dip" recessions of 1980-1982
during President Reagan's first term. From
that time onward, inflation and interest
rates have been on a 30-year down trend
(the "Great Moderation") to where policy
rates are virtually zero and inflation is
uncomfortably low.
What a turnaround, or as they say "be
careful what you wish for" or "beware of
success". The Fed has indeed successfully
fought inflation for 30 years and now, given
the collapse in aggregate demand and
financial de-leveraging: is it so implausible
to expect deflation? Sub-par economic
growth, too low inflation and a reading of
Fed statements has, in the view of many
analysts, positioned the Fed to announce,
possibly at the November 3 meeting, the
implementation of QE2. That's not a ship
we're talking about but rather a second
round of quantitative easing.
Leumi International
Private Banking Centers
Some, including several Fed officials,
believe additional large scale asset
purchases (LSAP) will do little to further
stimulate aggregate demand or bring
down the unemployment rate. Others
argue that it will require several $trillions to
boost GDP by 0.5% over a two year period.
But others disagree including William
Dudley, President of the New York Fed, who
recently said "further action is likely to be
warranted unless the economic outlook
evolves in a way that makes me more
confident that we will see better outcomes
for both employment and inflation before
too long." Mr. Dudley added that the
purchase of $500 billion of bonds would
have a significant impact.
Herzelia
And let's not forget the Fed Chairman
himself, sometimes referred to as "Helicopter
Ben", because of a speech he delivered in
2002 to the National Economists Club (the
Bernanke Doctrine). In that speech he
said that to combat deflation a Central
Bank could simply print money; and Milton
Friedman likened this to dropping money
from a helicopter.
Tel: +44-20-7907-8000
I strongly suggest you read that speech as
you will then understand why Bernanke is
unlikely to stand idly by and allow the U.S. to
deflate. He will do something to preclude
such an outcome. The rise in gold could
be hinting that inflation is the inevitable
long term outcome of additional LSAP. The
cheapening of the U.S. dollar is a weapon
against deflation. Lower 10-year rates near
2.25% are likely by year-end if LSAP are
announced as well as will a rising equity
market if the Fed goes "all-in".
By: Bob Giordano, Treasury Management, Leumi USA
Tel Aviv
Tel: +972-3-621-7444
Tel: +972-3-621-7333
Jerusalem
Tel: +972-2-620-1811
Leumi Domestic Private
Banking Centers
Tel Aviv
Tel: +972-3-623-7300
Haifa
Tel: +972-4-835-0333
Tel: +972-9-960-9311
Jerusalem
Tel: +972-2-620-1877
U.S.A.
Bank Leumi USA
New York Head Office
Tel: +1-917-542-2343
Switzerland
Bank Leumi (Switzerland)
Tel: +41-58-207-9111
Luxembourg
Bank Leumi (Luxembourg) S.A.
Tel: +352-346390
United Kingdom
Bank Leumi (UK) plc
Bank Leumi (Jersey) Limited
Tel: +44-1534-702-525
Leumi Overseas Trust
Corpration Ltd.
Tel: +44-1534-702-525
Romania
Bank Leumi Romania S.A.
Tel: +40-21-206-7075
For more information visit:
www.bankleumi.com
Editing: Smadar Ilan, Head
of Products Marketing
Department, Leumi Int’l and
Private Banking Division
Tel: +972-3-514-9989
E-mail: [email protected]