(Communicated by the Prime Minister’s Office)
Prime Minister Ehud Olmert, today (Tuesday), 1 April 2008, received the Bank of Israel’s 2007 Annual Report from BOI Governor Prof. Stanley Fischer, who presented several of economic achievements contained in the report. Among these were: 5.3% growth, a drop in the unemployment rate to a 15 year low, a reduction in poverty, balance in the state budget and a balance of payments current account surplus. Gov. Fischer also cited increases in Israel’s credit ratings by several of the world’s leading companies, the invitation for Israel to join the OECD and increased foreign investment in Israel.
Prime Minister Olmert said: "There is no doubt that last year witnessed several unprecedented achievements for Israeli society – a growth rate higher than in Western Europe or North America, for the fourth year; an apparent decline in poverty, for the first time in 25 years; the lowest unemployment data in years and increased exports. It is no coincidence that international companies have raised Israel’s credit ratings and that investors continue to be confident. The Government’s policy, led by Finance Minister Ronnie Bar-On, has proven itself and the Government will not deviate from the budgetary discipline it has set for itself. We will continue to maintain the three goals that we have set for ourselves: Reaching a diplomatic settlement, taking care of security and championing socio-economic issues, while maintaining budgetary balance. I can say that we are optimistic regarding the coming year. We expect growth to continue, even if at a slower pace than in previous years."
Summary of Bank of Israel Annual Report, 2007
Chapter 1: The Economy and Economic Policy
- Positive developments continued in many spheres in 2007: GDP rose by 5.3 percent; the rapid growth was led once again by the business sector, based on favorable background conditions; the rapid expansion of exports persisted; unemployment plunged to its lowest level in a decade.
- The ongoing improvement in the state of the economy was also reflected in decisions by external entities: the OECD organization invited Israel to embark on the procedure for joining it, and Israel’s credit rating was raised.
- The character of Israel’s economic expansion is changing: as the output gap narrows, growth is based to an increasing extent on an increase in factor inputs. Both employment and investment rose sharply in 2007. The expansion of private consumption also accelerated and demand pressures began to emerge, reflected inter alia in the contraction of the surplus on the current account and a surge in imports.
- The Consumer Price Index (CPI) rose by 3.4 percent in 2007, so that inflation exceeded the upper limit of the target range. Inflation accelerated in the second half of the year despite marked local-currency appreciation against the dollar. The acceleration was caused by the rise in world prices of fuel and food, especially in the last two months of the year, as well as by the expansion of domestic demand.
- Monetary policy acted to return inflation to the target range. In the first half of the year the Bank of Israel continued to reduce the interest rate in view of the low level of inflation and its deviation below the lower limit of the target range. In the second half of the year the central bank began to raise the interest rate as a result of the rise in inflation and inflation expectations.
- Until the end of 2007 the effect of the global financial crisis on Israel’s economy in general, and on the financial system in particular, was moderate. But the global financial crisis is not yet over, and there are concerns that at a later date it will have a more significant impact on Israel’s economy, impacting directly on the financial system as well as indirectly due to the slowdown in global economic activity.
- The government adhered to its growth-sustaining fiscal policy: the budget deficit was eradicated and the public debt/GDP ratio continued to contract. The expenditure target was maintained and tax rates were further reduced. Tax receipts rose as a result of economic growth, and the decline in public expenditure as a share of GDP persisted.
- The capital market continued to flourish and the resilience of the financial system improved. However, attention should be paid to the development of various risks in the financial system, inter alia against the backdrop of the boom and rapid structural changes. The regulatory and supervisory bodies should be adapted to these changes.
- Policy should persevere with measures that support sustainable growth, price stability and financial stability – also in view of the possible global economic slowdown and increase in risks. There should be a further reduction of the public debt/GDP ratio while steps should be taken to improve the level of the public services and reduce poverty. Policies aimed at allaying poverty should focus on a variety of measures designed to enable Israelis with a low level of education to find employment and increase their earning power.