“Expansion in real activity in the economy continued”, as shown by the 3.3% rise in the State of the Economy Index, says the Bank of Israel in its Recent Economic Developments for October 2006-March 2007. Another positive indicator is the persistent fast rise in tax revenues.
The Bank of Israel says, “The positive National Accounts data of the last quarter of 2006 and the latest indicators of the first quarter of 2007 point to a return to the path of rapid growth after the Second Lebanon War: GDP rose in the last quarter of 2006 at an annual rate of 7.3%, with a 10.2% surge in business sector product, compared with a drop in the third quarter of 2006, reflecting also a compensation due to the reduction caused by the War. The forces that led to the positive economic turnaround in the second half of 2003, including the calm security situation and the rise in world demand, reappeared in the period reviewed and resulted in the continuation of the growth trend that has characterized the economy in the last few years. The recovery in the construction industry - the first signs of which were detected at the beginning of 2006 - continued in the period reviewed; and the tourist industry too continued its recovery following the Second Lebanon War.
“Demand continues to dictate the rate of growth, but in contrast to the period of recovery from the recession - when capital utilization rose, with a sharp increase in total factor productivity and labor productivity - the supply side is also expanding.
“As the shekel strengthened against the dollar, so the consumer price index fell in the period reviewed by 1.1%. This development was principally a result of the dollar's global weakening.
“The labor market continued to improve in the last quarter of 2006: labor input increased and the unemployment rate reached its lowest level since the beginning of the decade - 7.7%. Nonetheless, unemployment among the weaker sectors of the population remains high, and the depth of unemployment, relevant mainly to those sectors, increased in 2006.”
The Bank of Israel notes that domestic macroeconomic factors and the global weakening of the dollar as a result of the large and persistent deficit in the US balance of payments and the uncertainty regarding the US economy “in order to increase the likelihood of bringing inflation back to within the target range, the Bank of Israel gradually cut the nominal interest rate in the period reviewed by a total 1.5 percentage points, until it reached 4% in March. This created an unprecedented negative interest rate gap between the Israeli interest rate and that of the US, and closed the interest rate gap between Israel and the euro area, though these failed to stop the continued strengthening of the shekel.”
Published by Globes [online], Israel business news - www.globes.co.il - on May 2, 2007
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