The rate of private saving in Israel reached record levels in 2020, amounting to one third of disposable income, according to the Central Bureau of Statistics' National Accounts.
The rise in the rate of saving, despite the high level of unemployment in the Israeli economy, which reached 18% in January, is a probably a result of two parallel forces. One is the money that the government distributed to all citizens indiscriminately last year, because it was unable to distinguish between those in need of aid and those who were not. The other is the lockdowns, which reduced private consumption by more than 9% in 2020. This is a steep decline, larger than the average in the OECD countries, and second only to the declines in economies that have been especially hard hit by the coronavirus pandemic, such as Spain and the UK. The money not spent on consumption found its way to savings programs, and even to the stock market.
The Central Bureau of Statistics figures show that net saving by households in Israel in 2020 rose to a record 31.2% of disposable income. For the sake of comparison, in 2019, the rate of private saving was 21.3% of disposable income. Elsewhere in the world, saving rates were lower. In Canada, for example, the rate of saving as a proportion of disposable income was 15% in 2020 and 6.7% in 2019, and in the US the figures were 13.7% and 7.5%.
"The reasons for the rise in private saving are the rise in government transfers and the enforced reduction in private consumption," says Victor Bahar, chief economist at Hapoalim. "We are in the greatest crisis that the modern economy has known, and private saving is actually rising. This is surprising when one looks at what happened in previous crisis.
"The inability to consume forcibly reduced consumption, and government policy of compensation for loss of income brought us to a somewhat paradoxical situation in which in the worst of recessions private saving is rising sharply, and this is a global phenomenon. Generally, in an economic crisis, we would expect the rate of private saving to fall, because people lose their jobs and try to keep up their spending to maintain their usual standard of living despite their loss of income," Bahar says.
Israel is not the only place in which government aid was distributed indiscriminately. In the US, for example, even a year after the pandemic began, it is still technically difficult to identify those in need of support. "In the end, this has an effect on the financial markets," says Bahar. "The private savings look for somewhere to park, and this inflates prices of financial assets."
Meanwhile, we have seen inflation expectations shoot up in the past few weeks, globally and also in Israel.
"The public is very gradually starting to think that the money printing alongside the optimism generated by the vaccinations will lead to a situation in which more money will be chasing fewer goods and services, and it could be that classic theory will start to work and we will see inflation. This is no longer just asset price inflation, but inflation in the prices of goods that make up the Consumer Price Index, and so inflation expectations are rising all over the world."
How tolerant will the central banks be?
"The central banks are still more concerned about too early an exit from their expansionist policies, and so in the next few months we will not see a change in the policy tools being employed, but the market is starting to ask how long this will last. If there is 3% inflation in the US, and that is not an unrealistic possibility, will they wait two years before raising interest rates? Larry Summers said that the Federal Reserve would have to raise its interest rate next year, because inflation will jump, but on the other hand US Secretary of the Treasury Janet Yellen is not worried. Others on the financial markets cast doubt on the Federal Reserve's patience. There is a consensus that the interest rate will not be raised this year, but perhaps next year it will, and US ten-year Treasury bonds are starting to price in these rates."
Published by Globes, Israel business news - en.globes.co.il - on February 23, 2021
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