Macroeconomic Review- February 2020


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February 2020 Macroeconomic Review

Global Economy

The global economy is showing signs of stabilizing into 2020 thanks to the accommodative monetary conditions and the relief in the trade tensions. Most economic institutions forecasts reflect stability in Europe and the US, another slight slowdown in China, and a gradual recovery in emerging markets

o Efforts are being made to contain the spread of the Corona virus. China’s share of the world’s economy is 17% and its share of global GDP growth is 32.7% of the total, so that the extent of the virus’s impact on the Chinese economy is likely to have a major impact on the global economy, especially when the Chinese economy is initially experiencing a negative economic momentum that is reflected in a growth rate of about 6%, the lowest in decades

Negative interest rates are becoming a hot topic that is not going to go away anytime soon. Today, it is clear that zero interest rates are not the absolute limit, but the negative interest rates have heavy prices as banks profits erode, price bubbles fueled and companies, like consumers, may be deciding that if rates are negative they should adjust their expectations, save more and consume less. A recent strategic review conducted by more and more central banks is an initial signal of their desire to normalize interest rates

o After lengthy negotiations, Phase 1 of the trade agreement was signed between the two superpowers, US and China. The agreement does not remove much of the existing tariffs, but does include a number of important elements: China’s recognition of the need to protect intellectual property, China’s commitment to purchase US agricultural commodities, energy products, and other goods and services not less than $ 200 billion in 2020 -2021. Recognition that any forced transfer of technologies between countries will not be a prerequisite for doing business

United States

o After outperforming expectation at the end of last year, it is evident that the US economy is continuing to grow, albeit at a slightly slower pace. Monetary policy and the labor market continue to support consumer confidence and consumption, but the business sector, still licking its wounds from the trade war, now has to deal with uncertainty stemming from the spread of the Corona virus

o Supported by low interest rates and strong labor market, residential real estate is expected to continue to assist the economy for the second consecutive quarter and offset the subdued business investment. Housing starts jumped to a 13-year high, Existing home sales rose to highest since 2018, as inventories declined for a seventh-straight month and the median price climbed 7.8% YOY. Inventory to sales ratio dropped to 3 months, the lowest in more than two decades, a sign of a very tight market

Still solid is the appropriate definition of the state of the labor market, that continues to generate enough jobs to drive unemployment lower. The economy added 145K new jobs in December, below expectations, with average monthly jobs moderating to 176K jobs last year, the lowest level since 2011. The decline in hiring is slow, but noticeable, reflecting the fact that we are at the end of the business cycle. At this stage, a sharp increase in wages could be expected, but this is not the case now, with wages rising only 2.9% in the past year, the lowest level since mid-2018. Overall, the picture is complex and does not, at this stage, require a response from the Fed

o Following three cuts in 2019 and launching a renewed bond market intervention, the Fed kept main rate unchanged while signaling that the policy is unlikely to change because it is “appropriate to support sustained expansion of economic activity”. The Fed emphasized the need for inflation, now at 1.6% YOY, to return to its 2% objective, if only because of the need to allow maneuverability in the event of a renewed slowdown. It also downgraded its assessment of household spending to moderate from strong


o Ahead of US–China trade deal and UK election, outlook in the Eurozone has already begun improving as more and more economic indicators were showing signs of life. Now, as uncertainty is fading and international trade is expected to improve, the balance of risk that has been tilted to the downside might shift back to neutral, and with it later on the monetary policy stance

The recovery in the economy is evident mainly in the manufacturing sector, which is bottoming out. Although the PMI is still below 50 points (47.8), it recently climbed to the highest level in 9 months, which means the manufacturing sector is still contracting but at a much slower pace. Supported by the employment growth and increasing wages, alongside favorable financing conditions, the service sector continues to expand, albeit at a slower pace

o While sentiment in the business sector is improving due to the decline in uncertainty levels, warning lights have been flashing, after consumer confidence has recently dropped to the lowest level since January 2019, evidence of growing pessimism among consumers, which may further thwart their willingness to consume and damage the Eurozone economy resilience

Policy makers left interest rates and bond purchases unchanged, but announced the process of reviewing the strategy they have taken since the last review process in 2003. The announcement must be seen as an admission of the failure of existing policy, after a multi-year aggressive monetary operations, that included negative interest rates and a 2.6 trillion EUR of asset purchases, failed to revive inflation

o With the realization that central banks’ ability to influence the economy is limited, calls for governments to expand fiscal are growing. Naturally, Germany, the largest economy in the Eurozone, which recently announced that 2019 ended with a surplus of € 13.5 billion, is a major target for these calls. Unlike the past, calls for action seem to fall on attentive ears, and Germany is more willing to invest more in infrastructure, especially in technology


Local economy growth in 2019 was 3.3%, above market expectation. However, grasped between the political turmoil and the weakening global economy, the Israeli economy is expected to weaken. The BOI predicts 2.9% growth in 2020

o According to the Ministry of Finance the budget deficit in 2019 was 3.7% of GDP. The deficit is expected to decrease temporarily to 3.3% by 2020, assuming that the government runs on the basis of 2019 budget throughout 2020. However, The budget layout is uneven in light of large debt payments concentrated earlier this year, so that current budgetary spending by May will decrease by 15 billion Shekel, a fact that is expected to reduce domestic demand and dampen economic growth

Low inflation in Israel has become commonplace as the CPI in December remained unchanged and reached 0.6% in 2019, the sixth consecutive year below the inflation target. The strengthening of the Shekel and increased competition are the main reasons, hence the growing involvement of the BOI in the foreign exchange market

The BOI has left interest rates unchanged, while significantly increasing foreign exchange purchases, in order to curb the Shekel appreciation, which it claims has no economic justification and is due to short-term financial capital flows. The door remains open for interest reduction as well as the use of other means that have not been used so far

o The BOI’s intervention in the forex market and the rush to safe haven, resulting from the spread of the Corona virus, have recently created distortions in the forex market, in which Call options are more highly priced in relation to Put options. This phenomenon prioritizes the use of forwards for importers, and the use of Risk Reversals for exporters