Jerusalem, 3 November 1999

Bank of Israel 2nd and 3rd Quarter Survey

(Communicated by Bank of Israel Spokesman)

The Bank of Israel’s Research Department today issued its survey of 2nd and 3rd quarter economic developments.

The Economic Situation

There have been a number of positive developments regarding economic activity during this period. However, it is necessary to wait for data for the coming months in order to determine whether these trends are solid and whether they signal a recovery from the low level of economic activity of the past three years. Recovery has mainly been in demand, signaled by significant increases in investment goods and domestic consumption during the second quarter of 1999, as well as an export recovery. Third quarter indicators also point to accelerated activity, including the retail trade index, the industrial manufactures index and commercial revenue index.

Labor Market

The seasonally adjusted rate of unemployment rose by 0.1% in the second quarter to 8.8%, compared to the first quarter, equaling the level of the last quarter of 1998. The rise in unemployment, despite the signs of recovery, is due to the lag in employment following changes in economic activity. Average salary earnings rose between April and July, compared to the same period last year, reflecting a rise in private sector wages and offset by a decline in average public sector wages – the latter because wage agreements have not yet been agreed upon in principle.

Balance of Payments

Israel’s trade deficit continued to grow in the second and third quarters, due to the rapid rise in imports, relative to exports. Most imports were of investment goods, which rose by 22% in this period, compared to the same period in 1998. The prices of both imports and exports continued to decline and the conditions of trade worsened due to the rise in fuel prices. Quantitatively, there has been almost no change in exports compared to last year, while imports have risen. The trend of rising direct foreign investment has also continued during this period, and the scale of issues by Israeli companies abroad has been prominent.


The Consumer Price Index rose 4.7%, in annual terms, during the second and third quarters, compared to a decline in the first quarter of this year. Thus, the projected rate of inflation for the year is under 4% and inflation for the next 12 months and beyond – as derived from developments in capital markets – remains quite stable at over 4%. However, since September 1998, inflation has been consistently declining, although still remaining above the government’s inflation target of 3-4% annually for the years 2000 and 2001.

Public Sector

The rate of public sector consumption accelerated in the second and third quarters and continues to exceed the budget when compared to the deficit target. However, towards the end of this period, the excess trend has moderated, mainly due to a reduction in deviations in revenue collection compared to projections made at the beginning of the year. On the revenue side, a significant gap has accumulated because the average level of prices and GDP growth has been below projections and because estimates made regarding other income sources, such as fees, have not been realized. The gap in expenditures since the beginning of the year is explained in full by the lower than expected rate of price increases and the postponement in implementing wage agreements.

Financial and Capital Markets

Interest rates on the Bank of Israel’s reserves were gradually lowered between April and August, and have remained unchanged since then. This policy reflects the caution taken by the Bank of Israel against the background of the recent global financial crisis, the reduction in interest rate differentials – due to the rise in interest rates abroad in the third quarter of 1999 – and because projected rates of inflation for this and next year have been higher than their targets.