Economic Review

Economic Review
3rd Quarter 2009 No. 18
A sharp increase in Israeli portfolio
investment abroad
During the first five months of 2009
there were several substantial
developments in Israel's incoming
and outgoing capital flows. First,
foreign parties continued to invest
in Israel and their direct investments,
as reported by the domestic banking system, amounted
to approx. US$4bn in annualized terms. This figure is lower
than that of previous years; however, given the global
economic background, it still reflects a profound vote of
confidence in the Israeli economy.
The cumulative net portfolio flow of foreign parties
investing is Israel this year has been negligible, with
significant monthly volatility. Unlike foreign investors, Israeli
investors greatly increased their portfolio investments
abroad, and in annualized terms the outflow has reached
US$10bn (see accompanying chart). Mainly these
investments came in the form of foreign equities, which
reflect a stronger appetite for risk by Israeli investors. At
the same time, foreign direct investment (FDI) outflows by
Israelis were very low.
The sum of the capital inflows and outflows indicates that
so far this year there has been a net outflow that should
lead to a weakening of the shekel. However, other factors
served to strengthen the shekel. Included in these is the
ongoing increase in the surplus of the current account
of the balance of payments, following a decline in the
dollar value of imports.
Israel's state budget: a large deficit in the first half of 2009
In June 2009 the monthly fiscal deficit (net of credit granted)
amounted to NIS 6.9bn and year-to-date the budget has
accumulated to NIS 17.7bn. The annual budget target
deficit is NIS 44.4bn. For the sake of comparison, there
was a surplus of more than NIS 2bn in the corresponding
period of 2008. The source of the large fiscal deficit is
a sharp drop in state tax revenues that began in 4Q08.
During the second quarter of 2009 the decline in state tax
revenues continued, though the data indicate a slower
rate of decline in direct taxes and a slight increase in
indirect taxes from April 2009 onwards.
Assuming full replacement of government proposed
taxation sources that have not been approved, such as
the fruit and vegetable VAT, by alternate sources, such
as a postponement of the reduction of income tax rates,
then the 6% of GDP deficit target for 2009 seems well
within reach. The BoI recently expressed a similar
view, based on data for the first five months of
2009. Of course, for this to occur, a stabilization of
economic activity will be needed in the second half
of 2009 along with a halt in the decline in state tax
revenues. As to the impact on government capital
raising, meeting the target deficit means that the
outlook on government financing needs remains
unchanged and includes net bond flotation in the
Israel market of approx. NIS 40bn.
By: Eyal Raz, Economics Sector, Leumi Israel
After contracting 1.8% in
4Q08, economic activity
weakened further in 1Q09.
The initial estimate of –2.5 %
might be revised downward
to negative 2.6-2.7%. The
decline in GDP reflects an
abrupt retrenchment in exports stemming from the
collapse in world trade. Export-sensitive economies,
such as Germany, were particularly affected by this
detrimental development. Exports are anticipated
to fall markedly in the first half of 2009, mirroring
the ongoing decline in foreign demand. However,
China’s positive Purchasing Managers' Index and
an expected rebound in world demand point to
a progressively improving export picture in the
second half of the year. The sharp fall in exports,
in conjunction with low business confidence and
financing constraints also led to a substantial cutback in business investments. Capital spending
was additionally impacted by drastic destocking
activity, low capacity utilization and declining
corporate profits. The expected amelioration in
world trade as well as improvement in business
sentiment should eventually lead to a slowing of the
negative trend in investment. Residential real estate
investment has generally deteriorated and reached
severe conditions in some EU countries, such as
Spain and Ireland. The latest available data suggest
that housing demand is likely to remain subdued
over the coming months. Government investment is
anticipated to grow strongly in 2009 given various
initiatives. Trade should contribute negatively in 2009
as the sharp decline in exports, particularly during
the beginning of the year, is expected to exceed
the fall in imports by a wide margin.
Employment losses accelerated in 1Q09. Over the
last three quarters, almost 2 million jobs have been
erased, with Spain being disproportionally hurt.
Astoundingly, even the normally well-protected
public sector was affected by layoffs. The ECB
reckons that real disposable income should remain
broadly stable on average as the fall in employment
is anticipated to be offset by lower inflation as well
as supportive fiscal packages offered by various
euro area countries. The ECB acknowledges though
that precautionary savings will probably remain
high. Therefore, private consumption is expected
to grow albeit less rapidly than real income. Our
outlook is even more cautious in that respect as job
uncertainty will remain elevated until well into 2010.
Furthermore, consumers in the heavy tax-burdened
euro area know very well that fiscal-induced
deductions are temporary, and will be quickly
returned to levels that limit consumer spending as
soon as the situation allows. In summary, we expect
subpar economic growth for several quarters and
anticipate GDP to contract by 4.5% in 2009.
Headline inflation has collapsed and is likely to
continue its downward trend due to strong
downward base effects and past drops in
commodity prices. The core rate, however, has
remained surprisingly stable, fluctuating in a narrow
band of 1.4 to 2.0% since June 2006. Inflation
expectations over the medium to long term remain
firmly anchored and money as well as credit growth
continue to decline on a year-on-year basis. The
recent upturn in leading indicators has taken some
pressure off of the central bank to announce further
stimulus measures. Jean-Claude Trichet signaled
reluctance to join other central banks on the path
of quantitative easing. The recently announced
initiative to buy covered bonds is generally deemed
as insufficient, due to the meager size of the
program.
The Eurozone is clearly lagging other economies in
the current recovery. The slight steepening of the
yield curve reflects the first signs of stabilization,
mainly in leading indicators and as a reaction to the
international economic environment. Still, due to
the anticipated protracted economic sluggishness
in the euro area and a certain lack of coordinated
policy response across the region, we anticipate the
ECB will keep interest rates on hold as opposed to
other central banks that may raise rates sooner.
Consensus earnings expectations now seem
to reflect the current state of the economic
environment. While European stock markets are
generally more cyclical in nature and should benefit
disproportionally from an eventual economic upturn,
lagging growth in the Eurozone leads us to conclude
not to overweight this area. However, our previous
underweight has been neutralized. The P/E ratio of
10.6 for 2010 looks attractive. Additionally, the risk
premium has declined less than in other regions.
By: Esther Meier, Leumi Asset Management, Leum Switzerland
BROTHER, CAN YOU SPARE
A DIME?
After pulling out all the
stops, the government’s
$13 trillion (how many
dimes is that?) intervention
in support of financial
markets and the economy have finally slowed the
sickening pace of economic descent. Yet, because
of the normal lag between government intervention
and effect, the economy is still contracting but
perhaps at “only” a 2.0% pace in 2Q09; weak but
much better than the average 5.9% collapse of the
prior two quarters. And the outlook for 2H09 centers
around positive growth of 2.0% as the full effects of
the government's dole have even more impact. But
with the unemployment rate at 9.5% and predictions
that it will not peak until 2010 at 10.5%, the number
of unemployed could top 16 million versus 7.2 million
in early 2008. Unemployment benefits have already
been extended beyond the traditional 26 week
period. Unfortunately, with few new jobs being
created; those that are unemployed are remaining
unemployed for longer; this will most likely lead the
government to extend the benefit period once
again, and thus many Americans will be standing in
the unemployment line for quite some time.
WHAT A QUARTER!
Since this recession began 18 months ago almost
6.5 million jobs (360,000 per month) have been lost.
Jobs fell for the sixth consecutive quarter in 2Q09
by 1.3 million (435,000 per month). But as bad as
that figure is, it is better than the stomach-turning
2.08 million (691,000 per month) job losses of the
previous quarter, 1Q09. Sensing that the worst of
the economic contraction was past, equity markets
carried out their usual forward looking analysis and
rallied sharply. After bottoming at 667 in March, the
S&P 500 rallied to a June high of 956 (up 43%) before
retreating to 919 at the end of the quarter.
Interest rates also shot higher on a combination
of factors. First, a sense that the financial system
would survive re-invigorated risk appetites with
investors selling safe haven Treasuries for higheryielding alternatives. Second, a sense that the worst
of the economic contraction was over, led to a
reassessment of the timing of when the Fed would
begin to tighten. Third, the inconceivable size of the
federal budget deficit raises concern over continued
foreign support of our deficit. Fourth, will the growth
in the U.S. debt load lead to a downgrading of the
U.S. and finally, will all of this cause significantly higher
inflation? Clearly each of these concerns has merit
but the fact that they all converged at the same
time caused rates to overshoot on the upside. Tenyear rates, for example, rose from 2.65% to a high of
4.0% in early June before easing to 3.55% at the end
of the quarter. Looking ahead I expect 10-year rates
to trade in a 3.25% to 3.75% range.
DOLLAR FOR DOLLAR
The US dollar weakened in 2Q09 as a growing
appetite for risk caused a partial unwinding of the
U.S. safety net. Against the Japanese yen the dollar
fell almost 3.0% while the EUR rose 5.5%. The sterling
rallied 13% against the dollar, rising from 1.4325 at
the end of Q1 to 1.646 at the end of Q2, but this
was primarily due to the previous oversold condition
of the British currency following fears that the UK
government just was not big enough to prevent
a collapse of their banking system. For now, the
decline in the USD seems over and we look for a
3-5% strengthening in 3Q09. However, later in the
year and into 2010, a renewed weakness in the
currency could develop if participants sense that
the Fed keeps rates too low for too long. Such a
consensus could lead to a conclusion that the U.S.
might consider inflating its way out of debt by paying
off its debt with cheaper dollars.
By: Bob Giordano, Treasury Management, Leumi USA
The information in this newsletter is based on sources, including published sources ,which
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independently verified. The Bank makes no guarantee, representation or warranty as to the
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investment risks, including possible loss of the principal amount invested.
Judaica is Reinventing Itself
Recently, the musician, Berry Sakharof, released
an entire album of Ibn Gvirol's poems. In a radio
telephone interview, he was asked whether this
meant he was also joining the trend of modern
artists who are becoming believers. "Trend?"
Sakharof replied, "Then we're talking about a
thousand year old trend!"
Sakharof's response refers to a development in
which contemporary artists are searching for new
modes of Jewish expression. The trend exists in
poetry and music as well as in the visual arts.
Ritual objects have been designed and created
in every location in which Jews have lived. The
function of these objects stays the same, whether
it is a Kiddush cup for blessing the wine, or
candlesticks for holding the Sabbath candles, but
the style and ornamentation changes according
to the era and local culture.
When designing ritual objects, it is essential
to develop an updated modern language
that creates a dialogue with the cultural and
contemporary environment. The Judaica
field must adapt itself to the material and
contemporary cultural discourse from aspects of
both morphology and artistic expression.
Over recent years, in addition to creators,
purchasers and collectors of Judaica, museum
curators have been engaged by the field of
Judaica as well. The Jewish Museum in New York
is one of the leaders in the field. The museum,
located on Museum Avenue in Manhattan,
recently celebrated its 100th anniversary and
increasingly nurtures the affinity between Jewish
tradition and contemporary culture. Thus, for
example, the museum has placed orders with
designers such as Karim Rashid and Adam Tihany,
who will design Judaica items for their collection.
This coming September, the museum will open
a large exhibition called "Reinventing Ritual."
Approximately 40 designers and artists worldwide
will participate in the event. They will exhibit
a range of artistic works that were created
from the mid-1990's until today. The exhibition
curator, Daniel Blasco, has invited the Armadillo
Studio to exhibit two works of Judaica from this
period: Chess – "Oh Hevruta oh mituta" ("Either
Learning Partners or Death") and Seder Plate –
"Magbiya v'omer" ("Lift Up and Say"). The chess
creation (pictured below) expresses the visual
and conceptual parallel between learning with
a companion (in a Hevruta) in the Yeshiva world
and playing a game of chess. In both situations,
there is a dual confrontation of minds until a
decision or final outcome is achieved. The chess
pieces have undergone a transformation and
adaptation; each piece has been designed as a
knitted pattern. The board is 70 cm by 70 cm, and
the kipot (skullcaps) were crocheted by Midrasha
students while listening to their lessons. This work
was selected for the cover page of the exhibition's
catalog, published by the Yale University Press. This
work was created in a limited series of 18 units and
has been offered for sale to private collectors,
galleries and museums.
Israel
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The inspiration for modern Judaica works stems
from observing religious Jews' spiritual lives
and their lives on the street. Reflections on the
relevance of Jewish tradition and culture for the
modern artists' lives motivate their creations. The
Sabbath and resting from work, for example, are
an integral part of the working and creating lives
of modern designers.
Tel: +972-3-623-7300
In 2004, The Jewish Museum in New York purchased
Studio Armadillo's work, "The Shabbat Table" for its
modern Judaica collection. This work, which deals
with the elusive concept of holiness, is a white
Sabbath tablecloth that incorporates covers
for all the components of the Kabalat Shabbat
(welcoming the Sabbath) ceremony: the wine,
the challah and the Sabbath candles and, as
such, freezes this special moment.
U.S.A.
Over recent years, more designers have been
creating and selling modern Judaica works in
designer stores. Also, galleries are exhibiting artists
that deal with Jewish subjects. David Shperber
commented on the blossoming of creations that
deal with modern Jewish expression: "Exhibitions
such as these reinforce the claim that Israeli artists
addressing Judaism is not necessarily a passing
fad and can be perceived as a part of the cultural
essence of local art." (Ifcha Mistabra, pg.12)
Tel: +352-346390
The Reinventing Ritual exhibition will be presented
in the US:
At The Jewish Museum in New York from
February 7, 2009 to September 13, 2009;
At The Contemporary Jewish Museum in San
Francisco from September 28, 2009 to April 22,
2010.
The writers are the owners of Studio Armadillo
and are creators in the field of contemporary
Judaica.
www.StudioArmadillo.com
By: Hadas Kruk and Anat Stein, Studio Armadillo
Haifa
Tel: +972-4-835-0333
Herzelia
Tel: +972-9-960-9311
Jerusalem
Tel: +972-2-620-1877
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Bank Leumi (UK) plc
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Corpration Ltd.
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Bank Leumi Romania S.A.
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For more information visit our
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Editor: Smadar Ilan, Head
of Products Marketing
Department, Leumi Int’l and
Private Banking Division
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E-mail: smadari@bll.co.il