The immediate practical effect of the 0.3% drop in the Consumer Price Index (CPI) for June 2012 is to pave the way for another interest rate cut, if and when Governor of the Bank of Israel Prof. Stanley Fischer decides that the economic slowdown warrants it. While it is true that there were extenuating circumstances that pushed the CPI downwards, especially the drop in fuel and energy prices, and the seasonal drop in prices for fruits, we must not think that this was a one-off event. In a broader perspective, the CPI figures point to an economic slowdown and Israelis' fear of it.
Growth forecasts for the coming months still suggest an annualized GDP growth rate of 3%. The CPI data depict a different picture of slumping demand by households.
It should be reiterated that this is not a one-off event of the last month. Rather than looking at the figures for June, it is much more effective to look at the rise in the CPI over the preceding 12 months, which offers a picture of Israel's retail markets. According to the Central Bureau of Statistics, the CPI rose by just 1% in the past 12 months, well below the rate until a few months ago. Moreover, according to the Central Bureau of Statistics, the CPI excluding energy rose by 0.5%, and the CPI excluding rent rose by 0.2%. These numbers indicate a dismal mood and falling household demand.
The Consumer Confidence Index, compiled by Globes Research and pwc Israel, published last week, provide a glimpse for the reasons for the public's mood. Consumers' confidence in the economy and in their personal economic situation is falling fast. This did not begin a year ago, but two years ago, and the social protest during the summer of 2011 was a further brake, which prevented many manufacturers from trying to preserve their profit margins, even in conditions of falling demand.
It is therefore necessary to take into account that domestic demand will not save Israeli industry if export demand continues to fall in the coming months. In the past, there were cases when private consumption and exports offset each other, with one rising while the other fell. It is hard to imagine this happening this time, and there are sufficient strong reasons to assume that the slowdown in economic activity will not be halted anytime soon.
To see just how much Israelis believe that something will change in the economic climate in the coming months, it is necessary to look at the housing market. The Central Bureau of Statistics reported that a comparison of home purchases in April-May, compared with March-April, found that prices rose by 0.7%. Although this figure is not included in the CPI, it's significance should be highlighted: home prices are still rising, even as other prices are falling, or are stable. In other words, Israelis are not seeing a different sector, or alternative investment that can offer a positive return, and they are putting their money into real estate. This says something about the public's expectations about what is in store for the economy in the months ahead.
Published by Globes [online], Israel business news - www.globes-online.com - on July 16, 2012
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