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).


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.