Jerusalem, 3 November 1999
Bank of Israel 2nd and 3rd Quarter Survey
(Communicated by Bank of Israel Spokesman)
The Bank of Israel's Research Department today issued its survey
of 2nd and 3rd quarter economic developments.
The Economic Situation
There have been a number of positive developments regarding
economic activity during this period. However, it is necessary to
wait for data for the coming months in order to determine whether
these trends are solid and whether they signal a recovery from
the low level of economic activity of the past three years.
Recovery has mainly been in demand, signaled by significant
increases in investment goods and domestic consumption during the
second quarter of 1999, as well as an export recovery. Third
quarter indicators also point to accelerated activity, including
the retail trade index, the industrial manufactures index and
commercial revenue index.
Labor Market
The seasonally adjusted rate of unemployment rose by 0.1% in the
second quarter to 8.8%, compared to the first quarter, equaling
the level of the last quarter of 1998. The rise in unemployment,
despite the signs of recovery, is due to the lag in employment
following changes in economic activity. Average salary earnings
rose between April and July, compared to the same period last
year, reflecting a rise in private sector wages and offset by a
decline in average public sector wages - the latter because wage
agreements have not yet been agreed upon in principle.
Balance of Payments
Israel's trade deficit continued to grow in the second and third
quarters, due to the rapid rise in imports, relative to exports.
Most imports were of investment goods, which rose by 22% in this
period, compared to the same period in 1998. The prices of both
imports and exports continued to decline and the conditions of
trade worsened due to the rise in fuel prices. Quantitatively,
there has been almost no change in exports compared to last year,
while imports have risen. The trend of rising direct foreign
investment has also continued during this period, and the scale
of issues by Israeli companies abroad has been prominent.
Prices
The Consumer Price Index rose 4.7%, in annual terms, during the
second and third quarters, compared to a decline in the first
quarter of this year. Thus, the projected rate of inflation for
the year is under 4% and inflation for the next 12 months and
beyond - as derived from developments in capital markets -
remains quite stable at over 4%. However, since September 1998,
inflation has been consistently declining, although still
remaining above the government's inflation target of 3-4%
annually for the years 2000 and 2001.
Public Sector
The rate of public sector consumption accelerated in the second
and third quarters and continues to exceed the budget when
compared to the deficit target. However, towards the end of this
period, the excess trend has moderated, mainly due to a reduction
in deviations in revenue collection compared to projections made
at the beginning of the year. On the revenue side, a significant
gap has accumulated because the average level of prices and GDP
growth has been below projections and because estimates made
regarding other income sources, such as fees, have not been
realized. The gap in expenditures since the beginning of the year
is explained in full by the lower than expected rate of price
increases and the postponement in implementing wage
agreements.
Financial and Capital Markets
Interest rates on the Bank of Israel's reserves were gradually
lowered between April and August, and have remained unchanged
since then. This policy reflects the caution taken by the Bank of
Israel against the background of the recent global financial
crisis, the reduction in interest rate differentials - due to the
rise in interest rates abroad in the third quarter of 1999 - and
because projected rates of inflation for this and next year have
been higher than their targets.