Jerusalem, 1 November 2000

Economic Developments –
April to September 2000

(Communicated by the Bank of Israel)

The following are the main points arising from the review of economic developments in April-September 2000 – prior to the latest outbreak of security incidents – published today by the Research Department of the Bank of Israel.

Main developments

Indicators of economic activity show that in the period reviewed economic growth which had started in 1999:II continued, albeit more slowly towards the end of the period. With the expansion in activity, there was a significant rise in the number of persons employed and an improvement in the current account. In the first half of 2000 GDP rose at an annual rate of 5.6 percent from its level in the equivalent period in 1999, with even more rapid growth in the business sector. In the third quarter of the year the rate of increase of exports slowed, after rising steeply in the first half of the year. The state-of-the-economy index, which rose at a rapid annual rate of 5.5 percent in the first half of the year, rose moderately in the third quarter.

The principal industries

The index of industrial production surged in the first half of 2000, and remained unchanged in the third quarter. A similar trend was evident in the index of revenue in the trading industries, which covers also the service industries, with its rapid rise continuing throughout the period reviewed. The high growth rates in the wholesale trading industries and business services were particularly marked, while real estate expanded slowly. Business-sector product made the major contribution to accelerated economic growth, increasing by 7.9 percent, annual rate, in the first six months of 2000, following its 7.2 percent annual growth rate in the previous half-year. This large increase reflects expansion in manufacturing industry, and R&D activity in start-up companies. Goods and services imports rose quickly at the beginning of the emergence from the recession, and contracted in the last few months. Private consumption rose for the second successive quarter, with a cumulative rise of 5 percent, annual rate, in the first half of 2000. Exports of goods and services, which provide the main impetus for growth, increased by 21.3 percent in the first half of the year, mainly due to the large rise in manufacturing exports and tourism. Nevertheless, data for the second quarter, and apparently the third quarter too, were more moderate than those of the previous quarters. Tourism has been marked by high volatility this year: tourist bed-nights rose steeply in the first quarter, in 2000:II the trend was mixed, and in 2000:III there were signs of a reduction, which is expected to become more severe with the serious deterioration in the security situation, which has an immediate effect on the industry.

The labor market

In 2000:II the number of employed persons rose by 1.6 percent from the number in the previous quarter. This reflects the continued recovery in the demand for labor, which was also reflected in a rise in labor input of 2.2 percent, average, and an increase of 0.7 percentage points in the share of those in full-time employment. Nevertheless, the rate of unemployment in the second quarter rose slightly, by 0.1 percentage points, to 8.6 percent of the civilian labor force, against the background of the considerable rise in the rate of participation to 54.5 percent, the highest rate for a long time.

The balance of payments

In the first half of 2000 the current-account deficit declined to $ 1.1 billion, compared with $ 1.5 billion in the first half of 1999. This decline was due to a $ 240 million reduction in the deficit on the goods and services account, and a rise of the same magnitude in income from unilateral transfers. In 2000:III the rise in goods exports slowed, and this, together with the continued increase in imports, resulted in a higher deficit on the goods account.

Prices

Since the beginning of 2000 the Consumer Price Index (CPI) has fallen by 0.5 percent, and the general assessment is that the rate of price increases for the year will be considerably below the target. Prices declined by 4.8 percent in 2000:I, rose by 6.6 percent in 2000:II, and fell again by 3.3 percent in 2000:III. The fall in prices in the third quarter occurred against the background of appreciation of the NIS. The rate of change of the CPI since the beginning of the year (in annual terms) has been -0.6 percent, and an inflation rate of less than 1 percent is predicted for 2000 by economic forecasters.

General government

The total budget deficit in 2000 is expected to be far below the deficit ceiling of 2.5 percent of GDP set for this year (the target for the year in terms of the new definition, which does not include real realized profits of the Bank of Israel, is 3.6 percent of GDP). Public consumption in the first half of 2000 was up by 3 percent over the equivalent period in 1999 (seasonally adjusted). Total domestic expenditure, which also includes transfer payments and government investments, was higher by a real 5.7 percent in 2000 than in the same period in 1999, amounting to NIS 132.2 billion. Revenues in the first nine months of the year were NIS 9.4 billion higher than forecast on the basis of the seasonal path. Since the beginning of the year total tax revenues have been 16.5 percent higher in real terms than in the equivalent period in 1999.

The money and capital market

During the period reviewed the Bank of Israel reduced nominal interest by a cumulative 1 percentage point – from 9.9 percent in March to 8.9 percent in September. The downward trend of interest which has been evident since March 1999 was made possible by the decline in the inflation environment in line with the targets set for it. Interest-rate differentials between Israel and abroad have narrowed significantly as a result of both the reduction of the domestic interest rate and the increase in interest rates abroad, mainly in the US. The expected real rate of interest was 7.1 percent, average, in the third quarter.

   
 Economic Developments in April to September 2000-1-Nov-2000
 Economic Developments in April to September 2000-1-Nov-2000
Bank of Israel