Private sector wage pressure continues

ISRAEL - In Brief 05 Feb 2023 by Jonathan Katz

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Uncertainty regarding the judicial reforms continues Last week, the shekel strengthened and bond yields declined, partially correcting for the sell-off in the previous week. Several international investment banks have expressed concern regarding the proposed judicial reforms, including JP Morgan and Barclays, and the possible downgrading of Israel’s sovereign rating unless a reasonable compromise is reached. It will be crucial for markets to see if Netanyahu is willing to compromise on this reform. Although Netanyahu has mentioned this possibility the government continues to push forward in Parliament with the original proposal. Wage growth remains strong Private sector wages increased by 0.7% m/m in November 2022 (last month available) and 5.3% y/y (seasonality adjusted). Public sector wages remained stable in November and are up 2% y/y. The freeze in public sector wages in the past two years had a restrictive impact on wages/spending and therefore inflationary pressure as well. We expect an agreement by mid-year, most likely including a 10%-12% cumulative increase over two years. This will support private consumption, following deceleration in Q422 with chain store sales up only 1.5% saar and credit card purchases up 1.2%. Inflation forecast: Petrol prices declined by 4.4% on Friday as the excise tax reduction was reimposed for a period of two months. Electricity prices went up 8.2% in January and will be reduced by 1.5% in February. Tax on disposable utensils and soft drinks will be abolished in February. Monetary policy: Despite signs of slowing growth, we expect rates to push higher to 4.0% and possibly 4.25%. Recent shekel volatility and uncertainty regarding the...