Market pessimism on the back of plans for renewed lockdown

ISRAEL - In Brief 13 Sep 2020 by Jonathan Katz
Highlights of the Israel Weekly Macro Wrap Up Recent positive indicators likely to be temporaryWith Israel likely to enter a renewed closure (whether partial or total, it is still unclear), economic activity is likely to decelerate.We currently expect GDP growth to reach -5.5% this year (previously we had expected -4.2%). The severity of the closure remains uncertain.Unemployment (broad definition currently 12.1%) is expected to reach 15%.The fiscal deficit is expected to reach 11%-12% (we had previously expected 10%).Regarding inflation there are basically negating factors. Supporting higher inflation is some weakness in the shekel which is likely to continue in the short run, in light of economic uncertainty and slowing growth. Supporting lower inflation is weaker domestic demand, although some sectors such as food prices are expected to see higher prices in the short run due to strong household demand (as was the case in March). We maintain our inflation forecast of 0.5% in the NTM.Trade data points to manufacturing exports stabilizing in August but still down 15% y/y. Consumer imports have increased.Consumer confidence (CBS) inched higher in August to -24 from -30 in July, but is still way below pre-Covid level of -6 in February.In the first week of September credit card purchases slowed seasonality, due to the end of summer vacation. The bond market: Long yields moved higher last week, as the market is pricing in a larger deficit due to the expected closure. Breakeven inflation expectations declined due to the possibility of lower VAT (as proposed by Avi Simchon, Netanyahu’s economic advisor). We think this is unlikely.FX: Last week the shekel weakened by 2% again...

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