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BANK OF ISRAEL
Office of the Spokesman and Economic Information
Press Release
October 17, 2011
Recent Economic Developments: May-August 2011
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During the period being surveyed, May-August 2011, there was a slowing in the
rate of growth in Israel and an increase in uncertainty. This occurred against the
background of debt crises in Europe and volatility in the financial markets, the
fear of a major slowdown in global growth, continuing geopolitical instability in
our region and the effects of the social protests in Israel.
The output gap narrowed and together with the slowdown in the rate of growth
and the drop in the rate of unemployment to historically low levels this is perhaps
a sign that the economy is at a point beyond the peak of the business cycle.
The export of goods from Israel slowed, due to the dampening of global demand,
which was particularly noticeable in the hi-tech industries.
The low rate of unemployment and the slowing of the rate of expansion in
employment are indications that the economy is approaching full employment.
Based on fiscal developments until August, the forecasted budget deficit will stand
at close to 3 percent of GDP, which is in line with the budget deficit ceiling.
CPI rose at a moderate rate during the period being surveyed, with slower
increase prices of owner occupied dwellings (which is not included in the CPI).
During the period being surveyed, May-August 2011, there was a slowing in the rate of
growth in Israel and an increase in uncertainty. This occurred against the background of
debt crises in Europe and volatility in the financial markets, the fear of a major slowdown
in global growth, continuing geopolitical instability in our region and the effects of the
social protests in Israel. GDP grew by 3.5 percent in the second quarter, while the product
of the business sector grew by only 2.4 percent (both figures are expressed in annual
terms) and the Bank of Israel’s State-of-the-Economy Index rose by only a moderate
amount.
The output gap narrowed and together with the slowdown in the rate of growth and the
drop in the rate of unemployment to historically low levels this is perhaps a sign that the
economy is at a point beyond the peak of the business cycle. With regard to uses, the
export of goods declined against a background of slow global demand; the growth in
private consumption slowed and consumer confidence declined; and the accelerated
upward trend in investment began to level off. This may be evidence that producers feel
that there is no longer any need for major expansions in production capacity in view of
the expected slowdown in economic activity.
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The developments by specific industry were mixed: activity in manufacturing stabilized
overall, with a slowdown in export-oriented sub-industries and in tourism; in contrast,
there was continued rapid growth in commerce although at a slower rate than in the
previous period. The momentum in the construction industry continued though there are
signs that there is declining interest in the purchase of housing. During the period being
reviewed, a number of major policy measures were adopted in the area of housing. The
goal of these steps, which were partly motivated by the social protest, is to make it easier
to buy or rent a home.
Improvement continued in the labor market. The rate of unemployment fell to 5.5
percent, which is lower than prior to the 2008 crisis and is one of the lowest levels
reached in recent decades. Employment expanded, primarily in the business sector,
though at a slow rate, accompanied by a large increase in the number of those employed
in part-time positions and a drop in the number of those employed in full-time positions.
The low rate of unemployment and the slowing of the rate of expansion in employment
are indications that the economy is approaching full employment. Despite this, there are
still no major signs of pressure on wages, perhaps due to the entry of a large number of
workers in low-paid jobs and in part-time positions.
The export of goods from Israel slowed, due to the dampening of global demand, which
was particularly noticeable in the hi-tech industries. Exports to the US fell significantly
and exports to Europe were stagnant. The rate of increase in the import of goods started
to level off and this encompassed all categories, i.e. consumption goods, raw materials
and investment assets. The deficit in the current account grew during the second quarter
of 2011.
Tax revenues grew moderately and are below the forecasted seasonally-adjusted path,
particularly with respect to the collection of indirect taxes. Domestic expenditure
(excluding credit) was also below the seasonally-adjusted path, primarily due to the low
rate of utilization by government ministries. Based on fiscal developments until August,
the forecasted budget deficit will stand at close to 3 percent of GDP, which is in line with
the budget deficit ceiling.
Prices rose at a moderate rate during the period being surveyed, with slower increase in
owner occupied dwellings (which is not included in the CPI) and an end to the prolonged
increase in food and energy prices in Israel and worldwide. Inflation during the last
twelve months was above the upper boundary of the inflation target range though
expectations for the year fell significantly during the period to within the target range.
The prices of financial assets fell sharply towards the end of the period being surveyed,
simultaneous with the crash in markets worldwide, and the level of risk in the local
capital market grew.
The Bank of Israel interest rate was raised by 0.25 percentage points to 3.25 percent in
May and was left unchanged during the period being surveyed. The average nominal
effective exchange rate for the period being surveyed appreciated slightly relative to the
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previous period and there was less intervention in the foreign currency market by the
Bank of Israel.
There was a slowdown in global growth, especially in Europe, and in the rate of
expansion in global trade. The fears that the debt crises would spread to key countries on
the European continent and the downgrading of the US credit rating as a result of the
difficulties it is experiencing in reducing its budget deficit led to increased volatility in
the financial markets and an increase in uncertainty. The forecasts for world growth were
revised downward.