Shekel Editor's Review

Growth during the first half of the year was primarily the result of extensive exporting and high consumption. Exports of goods and services rose by 9.5 percent and private consumption increased by 5.6 percent. The third quarter increase was the result of rising private consumption, which grew by 2.8 percent. The remainder of the GDP components, hit by the shrinking of the global economy, decreased. Public consumption shrank by 2.9 percent, exports of goods and services went down by 13.4 percent and gross fixed capital formation declined by 15 percent. In addition, although Israelis kept on shopping, imports of goods and services lost 7 percent. The Central Bureau of Statistics forecasts that by the end of the year, public consumption will grow by 3.9 percent, exports of goods and services will increase by 3.6 percent and gross fixed capital formation, which includes infrastructure projects and housing, will see a 5.4 percent rise. Even the business sector is expected to produce positive growth of an impressive 4.5 percent.

The decline in third quarter national accounts can also be observed in the Economy Composite Index, which although indicating an accelerated growth of 3.5 percent during the first half of the year, lost more than 1 percent during the months of July to November. Most of the drop is attributed to declines in exports and imports. The only component that consistently rose was industrial production, which grew 0.3 percent from July to September. Although this figure is lower than the 3.8 percent increase recorded for the months of April to June, it still shows that the Israeli economy did not freeze.

Despite the drop in exports of goods and services in the third quarter, Israel’s balance of payments indicated a surplus of $0.5 billion in the current account following second quarter’s $0.3 billion surplus and resulted in a $1.6 billion surplus for the first nine months of the year. Although the goods account was still in a $ 1.6 billion deficit, the services account and the transfers account kept the total balance of payments positive.

Part of the above outcome may be attributed to the ongoing flows of foreign investments into Israel. From January to September 2008, total foreign investments reached $7.8 billion. During that period, foreign direct investments (FDI) remained strong, at a positive $8.3 billion, while foreign portfolio investments (FPI) turned negative as Israel experienced a net outflow of passive investments, such as stocks bonds and bank accounts owned by foreigners.

The tourism industry was one of the most successful Israeli industries this year. During the first eleven months of 2008, 2.8 million visitors entered Israel. That was a jump of 35 percent compared to the corresponding months in 2007 and an increase of more than 66 percent compared to 2006.

As sign of the strength in our economy, the unemployment rate dropped steadily in 2008 compared with 2007. At the end of the third quarter, unemployment reached 5.9 percent, which was lower than unemployment rates of some of the leading economies of the world. At the same time, participation in the civilian labor force remained at 56.4 percent. Reports of layoffs in the Israeli labor market are being published only now, long after many other countries have already tightened their belts.

The global slowdown lead to lower inflation in 2008. The CPI was 1.1 percent during July, yet dropped to -0.6 percent in November. Inflation for the past 12 months is 4.5 percent, and 3.9 percent year to date. Even though this is higher than the 1 to 3 percent target range set by the government, market expectations are that inflation will be lower next year, at around the level of 1 percent.

In an attempt to address the drop in prices, which indicates a slowing economy, the Bank of Israel reduced the Central Bank interest rate in the market from 4.25 percent in September to 2.5 percent in December and 1.75 in January 2009. This is the lowest level the Israeli rate has ever reached.

Exchange rates reflected the economic events in the local arena as well as in the global markets, and changed accordingly. In July, a low of 3.23 shekels per dollar was recorded but as the Israeli economy showed signs of slowing down, the exchange rate rose to about 3.8 shekels per dollar at the end of December. The Bank of Israel, enjoying the relatively cheap USD, continued its policy of increasing foreign currency reserves, and accumulated more than $10 billion since June, reaching the level of $ 41.4 billion by the end of December.

The government ended the year with a larger than expected deficit. Although November was the first month since the beginning of the year in which the cumulative balance of the budget was negative, December’s governmental income was substantially lower than forecasted. Thus the deficit reached NIS 15.2 billion, which is approximately 2.1 percent of GDP. The deficit is a direct result of the global slowdown and its impact on income from taxes.

In an effort to boost the economy the government is preparing a special stimulus program. The “acceleration program” contains incentives in the form of continuing reductions in taxes, easier access to credit for small and medium businesses, infrastructure projects and funding for programs that help the unemployed. In addition, the government is now in the process of approving a safety net for pension funds, so that retired people will be spared the harshest effects of the crisis.