Economic Review
Transcription
Economic Review
Economic Review 3rd Quarter 2009 No. 18 A sharp increase in Israeli portfolio investment abroad During the first five months of 2009 there were several substantial developments in Israel's incoming and outgoing capital flows. First, foreign parties continued to invest in Israel and their direct investments, as reported by the domestic banking system, amounted to approx. US$4bn in annualized terms. This figure is lower than that of previous years; however, given the global economic background, it still reflects a profound vote of confidence in the Israeli economy. The cumulative net portfolio flow of foreign parties investing is Israel this year has been negligible, with significant monthly volatility. Unlike foreign investors, Israeli investors greatly increased their portfolio investments abroad, and in annualized terms the outflow has reached US$10bn (see accompanying chart). Mainly these investments came in the form of foreign equities, which reflect a stronger appetite for risk by Israeli investors. At the same time, foreign direct investment (FDI) outflows by Israelis were very low. The sum of the capital inflows and outflows indicates that so far this year there has been a net outflow that should lead to a weakening of the shekel. However, other factors served to strengthen the shekel. Included in these is the ongoing increase in the surplus of the current account of the balance of payments, following a decline in the dollar value of imports. Israel's state budget: a large deficit in the first half of 2009 In June 2009 the monthly fiscal deficit (net of credit granted) amounted to NIS 6.9bn and year-to-date the budget has accumulated to NIS 17.7bn. The annual budget target deficit is NIS 44.4bn. For the sake of comparison, there was a surplus of more than NIS 2bn in the corresponding period of 2008. The source of the large fiscal deficit is a sharp drop in state tax revenues that began in 4Q08. During the second quarter of 2009 the decline in state tax revenues continued, though the data indicate a slower rate of decline in direct taxes and a slight increase in indirect taxes from April 2009 onwards. Assuming full replacement of government proposed taxation sources that have not been approved, such as the fruit and vegetable VAT, by alternate sources, such as a postponement of the reduction of income tax rates, then the 6% of GDP deficit target for 2009 seems well within reach. The BoI recently expressed a similar view, based on data for the first five months of 2009. Of course, for this to occur, a stabilization of economic activity will be needed in the second half of 2009 along with a halt in the decline in state tax revenues. As to the impact on government capital raising, meeting the target deficit means that the outlook on government financing needs remains unchanged and includes net bond flotation in the Israel market of approx. NIS 40bn. By: Eyal Raz, Economics Sector, Leumi Israel After contracting 1.8% in 4Q08, economic activity weakened further in 1Q09. The initial estimate of –2.5 % might be revised downward to negative 2.6-2.7%. The decline in GDP reflects an abrupt retrenchment in exports stemming from the collapse in world trade. Export-sensitive economies, such as Germany, were particularly affected by this detrimental development. Exports are anticipated to fall markedly in the first half of 2009, mirroring the ongoing decline in foreign demand. However, China’s positive Purchasing Managers' Index and an expected rebound in world demand point to a progressively improving export picture in the second half of the year. The sharp fall in exports, in conjunction with low business confidence and financing constraints also led to a substantial cutback in business investments. Capital spending was additionally impacted by drastic destocking activity, low capacity utilization and declining corporate profits. The expected amelioration in world trade as well as improvement in business sentiment should eventually lead to a slowing of the negative trend in investment. Residential real estate investment has generally deteriorated and reached severe conditions in some EU countries, such as Spain and Ireland. The latest available data suggest that housing demand is likely to remain subdued over the coming months. Government investment is anticipated to grow strongly in 2009 given various initiatives. Trade should contribute negatively in 2009 as the sharp decline in exports, particularly during the beginning of the year, is expected to exceed the fall in imports by a wide margin. Employment losses accelerated in 1Q09. Over the last three quarters, almost 2 million jobs have been erased, with Spain being disproportionally hurt. Astoundingly, even the normally well-protected public sector was affected by layoffs. The ECB reckons that real disposable income should remain broadly stable on average as the fall in employment is anticipated to be offset by lower inflation as well as supportive fiscal packages offered by various euro area countries. The ECB acknowledges though that precautionary savings will probably remain high. Therefore, private consumption is expected to grow albeit less rapidly than real income. Our outlook is even more cautious in that respect as job uncertainty will remain elevated until well into 2010. Furthermore, consumers in the heavy tax-burdened euro area know very well that fiscal-induced deductions are temporary, and will be quickly returned to levels that limit consumer spending as soon as the situation allows. In summary, we expect subpar economic growth for several quarters and anticipate GDP to contract by 4.5% in 2009. Headline inflation has collapsed and is likely to continue its downward trend due to strong downward base effects and past drops in commodity prices. The core rate, however, has remained surprisingly stable, fluctuating in a narrow band of 1.4 to 2.0% since June 2006. Inflation expectations over the medium to long term remain firmly anchored and money as well as credit growth continue to decline on a year-on-year basis. The recent upturn in leading indicators has taken some pressure off of the central bank to announce further stimulus measures. Jean-Claude Trichet signaled reluctance to join other central banks on the path of quantitative easing. The recently announced initiative to buy covered bonds is generally deemed as insufficient, due to the meager size of the program. The Eurozone is clearly lagging other economies in the current recovery. The slight steepening of the yield curve reflects the first signs of stabilization, mainly in leading indicators and as a reaction to the international economic environment. Still, due to the anticipated protracted economic sluggishness in the euro area and a certain lack of coordinated policy response across the region, we anticipate the ECB will keep interest rates on hold as opposed to other central banks that may raise rates sooner. Consensus earnings expectations now seem to reflect the current state of the economic environment. While European stock markets are generally more cyclical in nature and should benefit disproportionally from an eventual economic upturn, lagging growth in the Eurozone leads us to conclude not to overweight this area. However, our previous underweight has been neutralized. The P/E ratio of 10.6 for 2010 looks attractive. Additionally, the risk premium has declined less than in other regions. By: Esther Meier, Leumi Asset Management, Leum Switzerland BROTHER, CAN YOU SPARE A DIME? After pulling out all the stops, the government’s $13 trillion (how many dimes is that?) intervention in support of financial markets and the economy have finally slowed the sickening pace of economic descent. Yet, because of the normal lag between government intervention and effect, the economy is still contracting but perhaps at “only” a 2.0% pace in 2Q09; weak but much better than the average 5.9% collapse of the prior two quarters. And the outlook for 2H09 centers around positive growth of 2.0% as the full effects of the government's dole have even more impact. But with the unemployment rate at 9.5% and predictions that it will not peak until 2010 at 10.5%, the number of unemployed could top 16 million versus 7.2 million in early 2008. Unemployment benefits have already been extended beyond the traditional 26 week period. Unfortunately, with few new jobs being created; those that are unemployed are remaining unemployed for longer; this will most likely lead the government to extend the benefit period once again, and thus many Americans will be standing in the unemployment line for quite some time. WHAT A QUARTER! Since this recession began 18 months ago almost 6.5 million jobs (360,000 per month) have been lost. Jobs fell for the sixth consecutive quarter in 2Q09 by 1.3 million (435,000 per month). But as bad as that figure is, it is better than the stomach-turning 2.08 million (691,000 per month) job losses of the previous quarter, 1Q09. Sensing that the worst of the economic contraction was past, equity markets carried out their usual forward looking analysis and rallied sharply. After bottoming at 667 in March, the S&P 500 rallied to a June high of 956 (up 43%) before retreating to 919 at the end of the quarter. Interest rates also shot higher on a combination of factors. First, a sense that the financial system would survive re-invigorated risk appetites with investors selling safe haven Treasuries for higheryielding alternatives. Second, a sense that the worst of the economic contraction was over, led to a reassessment of the timing of when the Fed would begin to tighten. Third, the inconceivable size of the federal budget deficit raises concern over continued foreign support of our deficit. Fourth, will the growth in the U.S. debt load lead to a downgrading of the U.S. and finally, will all of this cause significantly higher inflation? Clearly each of these concerns has merit but the fact that they all converged at the same time caused rates to overshoot on the upside. Tenyear rates, for example, rose from 2.65% to a high of 4.0% in early June before easing to 3.55% at the end of the quarter. Looking ahead I expect 10-year rates to trade in a 3.25% to 3.75% range. DOLLAR FOR DOLLAR The US dollar weakened in 2Q09 as a growing appetite for risk caused a partial unwinding of the U.S. safety net. Against the Japanese yen the dollar fell almost 3.0% while the EUR rose 5.5%. The sterling rallied 13% against the dollar, rising from 1.4325 at the end of Q1 to 1.646 at the end of Q2, but this was primarily due to the previous oversold condition of the British currency following fears that the UK government just was not big enough to prevent a collapse of their banking system. For now, the decline in the USD seems over and we look for a 3-5% strengthening in 3Q09. However, later in the year and into 2010, a renewed weakness in the currency could develop if participants sense that the Fed keeps rates too low for too long. Such a consensus could lead to a conclusion that the U.S. might consider inflating its way out of debt by paying off its debt with cheaper dollars. By: Bob Giordano, Treasury Management, Leumi USA 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. Judaica is Reinventing Itself Recently, the musician, Berry Sakharof, released an entire album of Ibn Gvirol's poems. In a radio telephone interview, he was asked whether this meant he was also joining the trend of modern artists who are becoming believers. "Trend?" Sakharof replied, "Then we're talking about a thousand year old trend!" Sakharof's response refers to a development in which contemporary artists are searching for new modes of Jewish expression. The trend exists in poetry and music as well as in the visual arts. Ritual objects have been designed and created in every location in which Jews have lived. The function of these objects stays the same, whether it is a Kiddush cup for blessing the wine, or candlesticks for holding the Sabbath candles, but the style and ornamentation changes according to the era and local culture. When designing ritual objects, it is essential to develop an updated modern language that creates a dialogue with the cultural and contemporary environment. The Judaica field must adapt itself to the material and contemporary cultural discourse from aspects of both morphology and artistic expression. Over recent years, in addition to creators, purchasers and collectors of Judaica, museum curators have been engaged by the field of Judaica as well. The Jewish Museum in New York is one of the leaders in the field. The museum, located on Museum Avenue in Manhattan, recently celebrated its 100th anniversary and increasingly nurtures the affinity between Jewish tradition and contemporary culture. Thus, for example, the museum has placed orders with designers such as Karim Rashid and Adam Tihany, who will design Judaica items for their collection. This coming September, the museum will open a large exhibition called "Reinventing Ritual." Approximately 40 designers and artists worldwide will participate in the event. They will exhibit a range of artistic works that were created from the mid-1990's until today. The exhibition curator, Daniel Blasco, has invited the Armadillo Studio to exhibit two works of Judaica from this period: Chess – "Oh Hevruta oh mituta" ("Either Learning Partners or Death") and Seder Plate – "Magbiya v'omer" ("Lift Up and Say"). The chess creation (pictured below) expresses the visual and conceptual parallel between learning with a companion (in a Hevruta) in the Yeshiva world and playing a game of chess. In both situations, there is a dual confrontation of minds until a decision or final outcome is achieved. The chess pieces have undergone a transformation and adaptation; each piece has been designed as a knitted pattern. The board is 70 cm by 70 cm, and the kipot (skullcaps) were crocheted by Midrasha students while listening to their lessons. This work was selected for the cover page of the exhibition's catalog, published by the Yale University Press. This work was created in a limited series of 18 units and has been offered for sale to private collectors, galleries and museums. Israel Leumi Int’l and Private Banking Division Tel: +972-3-514-7717 Leumi International Private Banking Centers in Israel 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 The inspiration for modern Judaica works stems from observing religious Jews' spiritual lives and their lives on the street. Reflections on the relevance of Jewish tradition and culture for the modern artists' lives motivate their creations. The Sabbath and resting from work, for example, are an integral part of the working and creating lives of modern designers. Tel: +972-3-623-7300 In 2004, The Jewish Museum in New York purchased Studio Armadillo's work, "The Shabbat Table" for its modern Judaica collection. This work, which deals with the elusive concept of holiness, is a white Sabbath tablecloth that incorporates covers for all the components of the Kabalat Shabbat (welcoming the Sabbath) ceremony: the wine, the challah and the Sabbath candles and, as such, freezes this special moment. U.S.A. Over recent years, more designers have been creating and selling modern Judaica works in designer stores. Also, galleries are exhibiting artists that deal with Jewish subjects. David Shperber commented on the blossoming of creations that deal with modern Jewish expression: "Exhibitions such as these reinforce the claim that Israeli artists addressing Judaism is not necessarily a passing fad and can be perceived as a part of the cultural essence of local art." (Ifcha Mistabra, pg.12) Tel: +352-346390 The Reinventing Ritual exhibition will be presented in the US: At The Jewish Museum in New York from February 7, 2009 to September 13, 2009; At The Contemporary Jewish Museum in San Francisco from September 28, 2009 to April 22, 2010. The writers are the owners of Studio Armadillo and are creators in the field of contemporary Judaica. www.StudioArmadillo.com By: Hadas Kruk and Anat Stein, Studio Armadillo Haifa Tel: +972-4-835-0333 Herzelia Tel: +972-9-960-9311 Jerusalem Tel: +972-2-620-1877 Bank Leumi USA New York Head Office Tel: +1-917-542-2343 Switzerland Bank Leumi (Switzerland) Tel: +41-44-207-9111 Luxembourg Bank Leumi (Luxembourg) S.A. United Kingdom Bank Leumi (UK) plc Tel: +44-20-7907-8000 Bank Leumi (Jersey) Limited Tel: +44-1534-702-525 Leumi Overseas Trust Corpration Ltd. Tel: +44-1534-702-500 Romania Bank Leumi Romania S.A. Tel: +40-21-206-7075 For more information visit our web site: www.bankleumi.com Editor: Smadar Ilan, Head of Products Marketing Department, Leumi Int’l and Private Banking Division Tel: +972-3-514-9989 E-mail: [email protected]
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