Jerusalem, 2 February 2000
Bank of Israel Survey for 2nd Half of 1999
(Communicated by Bank of Israel Spokesman)
The Bank of Israel's Research Department today (Wednesday), 2.2.2000,
issued its survey of 2nd half of 1999:
The Economic Situation
Productivity data by economic sectors showed an economic recovery
that began in the 4th quarter of 1999. It is still too early to
evaluate the extent of the recovery because several indicators show a
slowing in the rate of growth, including the industrial manufactures
and combined indices, although they remained higher than in the first
half of the year. Despite the growth in manufacturing, unemployment
continued to rise due to the delay before unemployment trends follow
rises in production. In the second half of 1999, alongside the growth
in production and exports, investments in equipment and inventory,
private consumption and private consumption per capita continued to
rise, the latter at a relatively rapid rate, especially in the third
quarter. Domestic productivity, which had declined in the first
quarter of 1999, began rising, passing its level in the third and
fourth quarters of 1998 by approximately 2% vis-a-vis the comparable
periods in 1999.
Balance of Payments
The current trade balance deficit declined in the third quarter of
1999 due to a significant rise in balance of trade deficit of goods,
a decline in the balance of trade deficit of services (mainly due to
a rise in tourism) and a significant rise in unilateral transfers.
The current deficit was financed by capital transfers from abroad at
a rate similar to 1998 ($400 million) and by investments by foreign
residents ($500 million).
Prices
The Consumer Price Index rose by 3.5% in annual terms in the second
half of 1999. Inflationary expectation for the July-October 1999 was
higher than the annual inflation target, but had declined to target
levels (3-4%) in the final months of the year. The low rise in prices
is mainly explained by tight monetary policies. These policies were
generally not eased in 1999 (following the inflation spike at the end
of 1998) due to uncertainty regarding the inflationary
environment.
Public Sector
Public consumption expanded at a higher rate that GDP due to
increased public sector employment, among other factors. Revenue from
taxes, although rising toward the end of 1999, was below forecast for
1999 due to lower than expected economic growth. Domestic
expenditures were lower than budgeted due to the delay in
implementing wage agreements. There was an upward deviation from the
budget deficit target in 1999, although it remained lower than
forecast, partly because tax revenue in the last four months of 1999
there was higher than the updated September forecast predicted. Due
to the higher than expected revenues at the end of 1999 compared to
the tax base assumption for the 2000 budget, and the likelihood that
the growth rate will be greater 3% (which forms the basis for revenue
forecasts for the year), tax revenues for the 2000 fiscal year will
be higher than assumed. Therefore, it is important that government
expenditures do not exceed budgets (so that the 2000 deficit will be
lower than the 1999 deficit) and that the multi-year projections to
decrease the government deficit are maintained.
Labor Market
The labor market remained slack in the second half of 1999, with the
unemployment level reaching a peak of 9.2% in November. However,
various indicators - mainly those concerning manpower exploitation
and the depth of unemployment - show that production growth may
signal a change in the labor market. The public sector was hiring in
the third quarter of 1999, helping to reduce the level of
unemployment, but the overall unemployment level continued to rise
due to the significant rise in the labor force. Real wages for
employees continued the rise from the first half of 1999, although at
a lower rate. Real wages in the private sector rose because of lower
than expected inflation, among other factors. Public sector real
wages declined because of the delay in signing new wage agreements in
several sectors, among other factors.
Financial and Capital Markets
The Bank of Israel interest rate continued to gradually decline in
the second half of 1999 against a background of uncertainty regarding
the inflationary environment during most of the year and the
reduction in the interest gap between the local and global economies.
Throughout the year, interest rate policy was intended to keep
inflation within the target set by the government for the next two
years. The lowering of the nominal interest rate was slower than the
expected decline in inflation, and the real interest rate rose. The
value of the stock market rose significantly, while trading rose
gradually even as the extent of issues in the capital market remained
relatively low.