Bank of Israel Economic Developments Survey - Oct -99-Mar -00

(Communicated by the Bank of Israel Spokesman)

Jerusalem, May 14, 2000

Economic Sectors

- GDP grew by 5.8% in annual terms (corrected for seasonal fluctuations) in the last quarter of 1999, continuing the growth of the previous two quarters. The rapid growth was mainly the result of growth in exports, gross domestic investment and public consumption.

- In the first quarter of 2000, there has been a slowing in the recovery of business activity.

- The demand for high-tech exports and the rise in tourism were among the factors contributing to the high level of economic activity between October 1999-March 2000, reflecting expected economic growth in industrial countries and in global trade, as well as an expected rise in private consumption based on the surge in capital markets and a rise in immigration since the end of 1999.

- These trends are expected to continue, although at unclear levels, since they are affected by future developments in the local and global foreign exchange and capital markets.

- Domestic private consumption continued to increase in the first quarter of 2000, although concentrating on imports rather than local production. Exports in the first quarter rose, albeit at a lower rate than in the third and fourth quarters of 1999 despite the revaluation of the exchange rate of the Shekel.

Labor Market

- There was a major rise in labor demand in the fourth quarter of 1999.

- The rise in unemployment over this period reflects a parallel rise in the labor force that rose sharply to 54.3% of the working-age population. This has apparently been the result of an expected improvement in the chances of finding employment among people who had earlier ceased looking for work during the recession.

- Since the increased labor force has largely been absorbed by the private sector, unemployment rates have remained unchanged. Approximately three-quarters of the newly employed were absorbed by the private sector - mostly in full-time employment - even as the number of work-hours for the employed remained unchanged at its high level in the fourth quarter of 1999, following a rise in the previous two quarters.

- According to data on unemployment trends calculated by the Central Bureau of Statistics, there has been no turn-around and unemployment remains at 9.1%

Balance of Payments

- Exports and imports continued to expand at a good rate during the period under review, although data from the Central Bureau of Statistics points to a leveling-off in the first quarter of 2000.

- There has been a parallel rise in foreign capital investment in Israel mainly by capital raised abroad by Israeli companies.

Public Sector

There was sharp rise in tax revenues during the period under review. Consequently, the 1999 budget deficit was below expectations.

The rise in tax revenues - which has continued during the first quarter of 2000 (some of it one-time income) - is the result of the increased economic activity, including the rise in private consumption and the surge in the capital markets due to the changes in taxation legislation.

Prices

The Consumer Price Index declined by 1.5% (in annual terms) during the period under review, accompanied by a lower than forecasted rate of inflation for 1999 - as can be seen from the rates paid on bonds in the capital market which dropped from 6.2% in September 1999 to 2.5% in March 2000. Private organization and banks' inflation forecasts have also been lowered to 3.4% from 5.1%.

Capital and Financial Markets

- Monetary policy continued to gradually reduce the Bank of Israel's nominal interest rate during the period under review, in light of the decline in the inflation forecast for the coming two years, and in order to achieve the government's inflation target. The rate of reduction has been influenced by the rapid reduction in the interest differential between the Shekel and foreign currencies - mainly the US Dollar - and its possible affects on the composition of the public's assets and debts.

- Expected real interest rates on Bank of Israel sources rose to 7.8% in March and dropped to 7.2% in April.

Research Department Forecasts for 2000

- Updated forecasts by the Bank of Israel Research Department show 4% GDP growth, up from 3% in October 1999. GDP per capita is forecast to rise by 1.6%. The update is based on current rates of growth over the last two quarters which have led to higher than forecast growth in the beginning of 2000.

- Business production is expected to rise by 4.5% in 2000, compared to 2% average growth in the past two years. The accelerated growth rate is based on the rise in measured productivity resulting from the exploitation of production resources and structural changes that has expanded the weight of the high-tech sector, a rise in employment and drop in unemployment. Other factors affecting the forecast of business activity growth are a continued rise in global trade, further structural changes in the direction of high-tech industry and tourism.

- Exports and private consumption are forecast to rise accordingly.

- Further economic recovery is partly dependent on the expansion of global trade.