The best of all worlds: strong growth and low inflation

ISRAEL - In Brief 19 Sep 2016 by Jonathan Katz
Recent economic indicators have surprised on the upside Q216 growth was revised to 4.0% SAAR (from 3.7%).PMI up 6.9 points in August on strong export orders.Job vacancies/labor market reached 4.1%, up from 3.3% one year ago.Strong growth in Q316 likely to be maintained. Israel's strong external position remains shekel positive. Current account surplus declined only slightly in Q2 to 3.9% GDP.But strong FDI has made up for weaker CA surplus.Portfolio flows have been shekel supportive in 1H16. Despite strong growth, inflation moderates in August. Core inflation (BOI definition) slows to 0.7 y/y from 0.8%.Housing prices, both rentals and purchases, slow. We expect inflation to reach 0.8% in the NTM, assuming: Housing rental prices continue to increase 2.0%-2.5% on strong disposable income and higher employment.Average real wages increase by 3.5%-4.0%.Shekel appreciates this year, but shows some weakness in 2017.Global commodity prices move slightly higher.MOF measures to increase competition (mostly in food sector) shaves of 0.5% inflation.Rates are expected to remain stable until early 2018.

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