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Leumi Economic Weekly
February 25, 2009
The composite state-of-the-economy index continues its substantial downward trend
The composite state-of-the-economy index (also known as the S-index), published monthly
by the Bank of Israel (BoI), fell 1.2% m/m in January, reflecting an acceleration in the
continued downward movement in the index that has been evident for six months already.
One indication of the severe deterioration in January's index figure was the fact that most
components of the index fell, in particular proceeds in the trade and services sectors.
The state of the economy "S" index
Month-on-month rate of change
1.5
% m/m
1.0
0.5
-0.5
-1.0
01
/0
6
04
/0
6
07
/0
6
10
/0
6
01
/0
7
04
/0
7
07
/0
7
10
/0
7
01
/0
8
04
/0
8
07
/0
8
10
/0
8
01
/0
9
-1.5
According to the BoI, this is another sign of the Israeli economy's slide into recession, which
has been evident since the fourth quarter of 2008 (additional details on this issue is presented
below in regard to the decline in Israel's GDP in the last quarter of 2008). The slide of
economic activity in Israel into recession can be strongly linked to the substantial
deterioration in the financial and economic positions of Israel's main trading partners.
Alongside these external factors, it is also important to point out the public's concerns
regarding a severe economic slowdown. These concerns on the part of the public are being
reflected in a slowdown in the expansion of private consumption. This is the result of both a
substantial decline in the public's portfolio of financial assets, and also as a result of a
weakening in business confidence.
Israel's GDP shrank in the fourth quarter of 2008
Israel's GDP contracted 0.5% in the fourth quarter of 2008 compared to the preceding quarter
(in annualized terms and excluding seasonality). The decline in economic activity is even
more noticeable in data on Israel's business sector product, which fell 1.2% during the final
quarter of 2008.
BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION
The Economics Sector, P.O.Box 2, Tel Aviv 61000
Ph: 972-3-514-8737, Fax: 972-3-5147375, e-mail: [email protected]
http://english.leumi.co.il/Home/
The fall in the GDP in the final quarter of 2008, together with additional indicators clearly
signals in our opinion the Israeli economy's slide into recession. This process can be seen in
almost all components of economic activity within the private sector. Thus there was a
decline registered in the following central components of economic activity: private
consumption per capita (-5.4%); investment in the economy (-1.8%); and exports (-21.4%).
Looking forward to all of 2009, the year is expected to be characterized by a decline in the
business sector product.
A slide
into
recession
2006
war
%
12
10
8
6
4
2
0
-2
-4
GDP: total and business sector
quarter-on-quater rate of change, annualized terms and
seasonally adjusted
I-III IV- VII- X- I-III IV- VII- X- I-III IV- VII- XVI IX XII
VI IX XII
VI IX XII
2006
2007
Business sector
2008
Total GDP
The BoI has slowed its rate of interest cuts, as the bank comes to the end of this process
and moves towards implementing "non-conventional" instruments
Against the backdrop of the substantial decline in economic activity, on February 23 the BoI
announced a 25bps cut to its interest rate for March, bringing the rate to only 0.75%. In
contrast to the interest rate cuts implemented since October 2008, which were in increments
of 50-75bs each, the current move was of a more moderate rate. This is signaling that the
central bank is approaching the end of "conventional" steps in the process of monetary
expansion.
Now, while on one hand the process of cutting interest rates in the economy comes to its
conclusion, yet on the other hand the economy remains weak and there exist concerns
regarding a potential slide into deflation, the BoI needs to continue to expand the money
supply in the economy, and thus will begin to implement "non-conventional" policy
instruments. Within this framework the BoI will implement tools for the purpose of injecting
money into the economy with the hope that this action will ultimately contribute towards
achieving a number of targets including: increasing local demand and helping real economic
activity to recover, and also facilitating the return of inflation from its current negative
environment to within the price stability target range of 1-3%. These policy tools include the
purchase of government bonds on the secondary market, loan tenders and monetary deposits,
creating net redemptions of T-bills (Makams), repurchase agreements (repos), foreign
currency purchases, and more.
The drop in the BoI interest rate to such a low level in nominal terms, together with the
impact of substantial and consistent monetary expansion that is in turn raising inflation
expectations (sooner or later), will lead to an additional slide in the interest rate of the BoI in
real terms. We note that the BoI interest rate in real terms has not been in negative territory
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_________________________________________________________________
BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION
since the beginning of the 1990s, when the economy was still experiencing double-digit
inflation. In other words, the coming monetary processes represent a significant challenge for
Israel's policy makers as they attempt to navigate the economy under conditions different
from those they have known over the last decade.
Our hope is that this process will turn out well, both in terms of achieving the goals
mentioned above, and also in terms of bringing about a "smooth" return to "conventional"
policies when the conditions allow for it. That is to say, the policy makers need to will also
need to avoid continued monetary expansion that is too quick, which would be reflected in an
upward deviation from the price stability target in the coming years (in 2010 and onwards).
The short term real interest rate
in the US and in Israel
10
07.
01
20
07.
0
200 4
7 .0
200 7
7. 1
200 0
8. 0
200 1
8. 0
200 4
8. 0
200 7
8. 1
0
20
09.
01
07
20
06.
20
06.
1
04
06.
0
7
4
US
20
6. 0
200
5. 1
200
5. 0
200
5. 0
200
200
5 .0
1
Israel
20
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
The real interest rate=the central bank rate less inflation expected for the
next 12 months
Author:
Dr. Gil Bufman
The data, information, opinions and forecasts published in this publication (the “Information”) are furnished as a service to the
readers and do not necessarily reflect the official position of the Bank. The above should not be seen as a recommendation and
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The Information may contain errors and is subject to changes in the market and to other changes. Likewise, significant
discrepancies may arise between the forecasts contained in this booklet and actual results. The Bank does not undertake to
provide the readers with notice, in advance or in retrospect, of any of the aforementioned changes by any means whatsoever.
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them may, from time to time, have an interest in the information represented in the publication, including in the financial assets
represented therein.
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_________________________________________________________________
BANK LEUMI LE-ISRAEL, THE FINANCE & ECONOMICS DIVISION