Bank of Israel Economic Overview - May 14, 2000
(Communicated by the Bank of Israel Spokesman)
Jerusalem, May 14, 2000
Following are the main points of a speech delivered today (Sunday)
14.5.2000 by Bank of Israel Director of Research Prof. Leo Leiderman
at a seminar at Tel Aviv University's Sapir Center:
On the Updated Forecast for Economic Activity for 2000
The updated forecast published today by the Research Department shows
economic growth in 2000 to be double the rate of the past two years,
with GDP rising 4% and business sector growth up 4.5% as a result of
the economy moving from the negative GDP per capita growth of the
past two years to a projected growth of 1.6% for 2000. It is
important to note that these projections are also based on an 11% or
higher projected export growth (excluding diamond exports) this year.
On the Economic Recovery and Projected Growth for 2001
The forecast update for growth is mainly based on the accelerated
growth figures from the second quarter of 1999 onwards which have led
to a higher GDP estimates for early 2000 than were used for this
year's budget evaluations. This year's average economic activity is
consequently higher in comparison to the level of 1999. Quantitative
estimates of economic activity for 2001 have not yet been developed.
Sharp fluctuations in most of the economic indicators make projecting
the effect of current trends onto next year's economic environment
difficult since some indicators point to a weakening of the current
recovery compared to the second half of 1999. However, other
indicators suggest further recovery - in the first quarter of 2000,
there was a major increases in the exports of goods and tax revenues,
in particular in land taxes and import duties. Continued economic
recovery during 2000 - and even its strengthening - are important for
growth in 2001 to be at least as high as the level forecast for this
year.
On Monetary Policy
The focus on the lowering of the actual and projected rates of
inflation has enabled the Bank of Israel to lower interest rates from
13.5% in February to 9.3% in May. Consequently, and also due to the
rise in interest rates abroad, there has been a significant decrease
in the Shekel and foreign currencies' interest rate differential. It
seems that that the capital and foreign currency markets have
perceived the lowering of interest rates as careful and trustworthy,
consistent with the government's inflation target as well as taking
into consideration the reduced inflationary environment in Israel and
abroad. It is important that the inflation and budget deficit targets
for the coming two years at least are set in the first half of this
year so as to maintain the multi-year inflation target.
On the Ben-Bassat Tax Reform Committee Report
There is broad agreement regarding the general lines recommended by
the committee, including reducing the differences between income and
capital gains taxes, and aligning tax rates from differing types of
financial assets. However, there is an undoubted need for a
comprehensive public and professional debate - which has only just
begun - on certain specific recommendations that are open to question
and their effects on economic activity, the division of income and
inequality in society and on the stability of the financial markets.