"The trend of interest rate reductions by central banks around the world is close to its end," says Dr. Mark Zandi, chief economist of Moody's Analytics. Talking exclusively to "Globes," Zandi expresses great optimism about the economies of Israel, India and the US, alongside pessimism about China, Japan, Russia and Brazil. Nevertheless, he admits that the inequality in the US is a problem that will only worsen, and that the American political system is too much subject to the influence of large donors such as Sheldon Adelson and Haim Saban.
How do you explain the recent falls in the prices of US and German government bonds?
Zandi: "By the fact that the concerns over deflation has very much weakened, and inflation expectations have risen. Six months ago, there was a great deal of anxiety about deflation. That's over. Much of the interest rate reductions in recent months stemmed from the effect of the collapse in the price of oil, which put inflation down into negative territory, including here in Israel, especially in a state of high unemployment, combined with weak demand in Europe. It will take a long time before inflation starts to climb, but the US will be the first to raise the interest rate, followed by Europe, and Japan will be the last."
We recently read about a wave of pay hikes at US firms. Is this a sign that inflation is returning?
"It's a very positive sign. It's happening at McDonalds, Target, and Wal-Mart - corporations that supply a lot of jobs for unskilled labor. Several states in the US have raised their minimum wage. This is part of the general heating up of the US economy."
In your opinion, when will the Fed raise the interest rate, and by how much?
"In September in my opinion, but for the little guy, one month before or after that won't really make any difference. I assume that it will be by 0.25%, but it might be only a more modest hike of 0.15%. There are many technical matters, there's a lot of surplus reserves, and the question is how you raise the interest rate on this excess supply. Mechanisms are needed that have never been used, such as reverse repos, which up until now have been only experimental. Raising the interest rate will therefore be done very cautiously."
The main concern at the Bank of Israel is damage to exports resulting from a stronger shekel. Do you think that this concern is exaggerated?
"If I'm right, and the Fed starts raising the interest rate this year, and the ECB terminates quantitative easing next year, the pressure on the Bank of Israel to prevent the shekel from strengthening by lowering the interest rate is expected to ease. The shekel may weaken a little more against the dollar, but all in all will remain stable. The weakening of the euro is also mostly behind us. When the Fed starts a restrictive policy, the Bank of Israel will follow in its footsteps, if not in 2016, then in 2017."
Zandi, who was a guest of the Midroog credit rating company at last week's debt market forum, is very complimentary about the Israeli economy. "The performance of the Israeli economy in recent years makes Israel one of the world's best economies," he stated at the event.
What stands out in talks with foreign analysts and economists is the stark contrast between the complimentary and optimistic way they describe the Israeli economy and the way the economy is depicted by local economic commentators.
Is it possible that the foreign analysts are inclined to pooh-pooh the problems of the Israeli economy: stagnation in productivity, the bloated public sector, the defense budget, and entire population groups that have not been integrated into the employment cycle?
"I'm not saying there aren't any problems. There are problems, but here it's a relative matter of comparison with other countries. Israel looks good in a global context. That doesn't mean that there are no problems. Things can go wrong, but look back for a second. Your fiscal situation is better than ever, the debt-to-GDP ratio is low and continues to fall, your economy has been growing for 15 straight years, and there's almost no unemployment. Where productivity is concerned, it's a long-term global problem, but I think that there's also a problem measuring productivity. How do you measure productivity and added value in high tech and services? It could very well be that there's a lot of growth and added value in the Israeli economy that simply doesn't appear in the data."
Zandi's optimism about the US is surprising, but is well reasoned. "People are inclined to extrapolate from the current situation to the future. In 2008, on the eve of the crisis, there was a lot of unjustified optimism, and today there's a lot of unjustified pessimism. The economic situation is much better than people think, and this will become clear with time."
Can Europe become a second Japan - 30 years without growth?
"The European Central Bank's quantitative easing policy has managed to weaken the euro by 25%, stabilize inflation expectations, and energize the bank credit market. In my opinion, Europe will enjoy surprising growth rates of 1.5-2% this year. If they continue on this road, they'll manage to avoid a fate like that of Japan. If Europe stops now, the political dissolution continues, and political parties like Pademos in Spain continue to grow in strength, then Europe will go the way of Japan."
What about the problem of inequality?
"Unbalanced distribution of income is a real problem, and the recession has aggravated it. The growth that's coming now with the monetary policy will reduce it, but on the other hand, the structural factors that caused this situation are still present. Globalization and technology are creating a situation in which people like me can work anywhere in the world and profit from globalization, while people who lack professional training are harmed.
"Janet Yellen (chairwoman of the Fed A.B.), mentions this at every Congressional hearing. There's also a problem with the current political process in the US, which currently gives disproportionate power to the mega-wealthy. I'm referring to the US Supreme Court ruling that eliminated the restrictions on contributions to political parties, and enabled donors to remain anonymous. They now have an enormous effect on politics."
In Israel, we know of several such people.
"True. In general, they have good intentions, but I think that the influence they have on politics today is enormous, and I'm not sure it's healthy."
Published by Globes [online], Israel business news - www.globes-online.com - on May 17, 2015
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