Download Recent Economic Developments: September–December 2011

BANK OF ISRAEL
Office of the Spokesman and Economic Information
Press Release
Recent Economic Developments: September–December 2011
The English version will be available within several weeks

During the period September–December 2011, the rate of expansion of business activity in
Israel continued to moderate.

The slowdown in Israeli exports is a direct result of the crisis in the euro bloc and the slower
growth worldwide, which are apparently the main factors weighing on the Israeli economy.

Based on the narrowing of the output gap and the range of data on the labor market, it
appears that the economy reached the vicinity of full employment during the first half of the
year.

The moderation of the rate of growth led to a shortfall in the collection of taxes, particularly
indirect taxes. The overall deficit (excluding the provision of credit) totaled 3.3 percent of
GDP in 2011, in comparison to a planned deficit of 2.9 percent of GDP.

Despite the slower growth, a number of positive trends were noticeable during the final
months of 2011: the growth of high-tech manufacturing production and exports; the return
of indirect taxes collected to the level in January–April; and the greater willingness of the
public to purchase consumer durable goods and homes.

The rate of inflation, which had started to level off in March, continued to do so during this
period and totaled 2.2 percent for 2011 as a whole.
During the period September-December 2011, the rate of growth in business activity in Israel continued
to moderate. It appears therefore that the economy has passed the peak of the business cycle, following 18
months of continuous growth, leading to a decline in the unemployment rate. The GDP grew at a rate of
3.6 percent during the third quarter of 2011, which is consistent with the long-term growth rate. Leading
the growth during the third quarter was investment in fixed assets, while private consumption expenditure
grew at a moderate rate and exports (excluding diamonds and start-up companies) grew only slightly. The
negative impact on Israeli exports is a direct result of the crisis in the euro bloc and the slowdown in
global growth, which are apparently the main factors weighing on Israel's economy. An additional
indicator of the slowdown in growth of the Israeli economy is the sharp drop in imports, primarily
consumer goods and raw materials.
Based on the narrowing of the output gap and the range of data on the labor market (the decline in the
unemployment rate to a historic low, the accelerated increase in the wage per employee post and the
moderation in the rate of employment and the rate of growth in employee posts), it appears that the
economy reached the vicinity of full employment during the first half of the year. Slower growth in the
third quarter leveled off the unemployment rate, and will likely reduce the need for new investment. Thus,
without an increase in other uses, the slowdown in growth will continue.
The moderation in the rate of growth led to a shortfall in the collection of taxes, particularly indirect
taxes. In 2011 as a whole, total local revenues (not including credit) were lower by about NIS 5.7 billion
than the budget’s forecast, while the expenditure budget was almost fully utilized. As a result, the overall
deficit excluding credit totaled 3.3 percent of GDP, in comparison to the planned deficit of 2.9 percent of
GDP.
In contrast to the slowdown in growth, there were a number of positive trends in 2011: the expansion of
high-tech manufacturing production and exports; the return of indirect tax collection back up to its level
in January–April, following the sharp decline in the previous period; and the greater willingness of the
public to purchase consumer durable goods and homes.
Following the decision in principal to adopt the recommendations of the Trajtenberg Committee, the
government approved additions to the budget at the beginning of January in order to fund the
recommendations, as well other decisions taken by the government and the Knesset since the approval of
the biennial budget. These include the wage agreement reached with the high school teachers union and
with the physicians, and the raising of the minimum wage. In addition, the government decided to
increase the 2012 defense budget by NIS 3.5 billion. Overall, the decisions made indicate a net increase in
government expenditure of NIS 6.4 billion relative to the original budget. This is in addition to various
decisions that have already been made or are being discussed, which are also expected to raise
government expenditure. Despite the increase in total planned expenditure, there is at the moment no
intention of exceeding the expenditure ceiling of the 2012 budget.
The rate of inflation, which had started to level off in March, continued to do so during this period and
totaled 2.2 percent for 2011 as a whole. This is close to the center of the inflation target range (1–3
percent) while the expectations of the inflation rate over the next 12 months, as derived from the capital
market, fell to even below the midpoint of the target range. Contributing to the fall in the CPI were the
prices of food, education, culture and entertainment and transportation and communication. The housing
component declined during the period, partly seasonally-related, and a decline began in the prices of
resident-owned housing (which are not part of the CPI). These developments made it easier for the Bank
of Israel to reduce the interest rate during the period by a cumulative 0.5 percentage points, with the goal
of supporting real economic activity in light of the adverse effect of the global slowdown on the growth of
the domestic market.