Political instability could rattle fiscal credibility
Highlights:
Private consumption appears to be slowing modestly.
- Credit card purchases are up 6.5% saar in February-April, slowing from 7.6% in the previous three months.
- Chain store sales are up 1.0% saar in February-April, following 0.2% in the previous three months.
- Retail trade remained flat in Q1 2019 following growth of 1.2% in Q4 2018.
- Some softening PC demand supports weak inflationary pressure, but some wage growth, full employment and strong confidence will support household demand.
The composite index of the BoI is pointing to steady growth in early Q2 2019.
Service exports are up 8.1% q/q (36.8% saar) in Q1 2019 (80% hi-tech). This is a major growth driver, and supports a steady CA surplus.
Inflation forecast: We currently expect inflation to reach 1.3% in the next 12 months, as we assume a slightly weaker shekel (see below), and more tax hikes in early 2020 due to the expanding fiscal deficit. We are assuming an impact of 0.4% on inflation in Q1 2020 (including VAT by 1%). On the other hand, lower global oil prices will moderate inflation in June and July.
Monetary policy: Our base scenario assumes rate stability this year, but much will depend on the shekel. If the shekel weakens somewhat and inflation drifts higher towards 1.5% y/y, a rate hike sometime this year remains a possibility.
Politics: Israel is going to another round of elections on September 17th, following the failure of Netanyahu to form a government. Lieberman refused the compromises offered to him regarding the mandatory army service law, requiring the ultra-religious to serve (in a gradual way). Due to the fragmentation of Israeli politics and animosity between Netanyahu and Lieberman, it is not at all clear that a stable coalition will be formed following the next election. Political instability could support a weaker shekel and higher bond yields.
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