Chapter 1 - The Economy and Economic Policy

Summary:

  • Developments in the economy were particularly positive this year, and were reflected in several areas; GDP grew by 5.1 percent, led by an increase in high-tech exports ;rapid growth has continued now for more than three years ;employment fell to its lowest this decade and reached 7.7 percent this year; the debt to GDP ratio fell significantly ;the surplus in the current account was very high, and foreign investment in Israel reached record levels. The pace of growth and market stability were all the more impressive in light of several shocks, primarily the Second Lebanon War.  
  • The character of economic growth changes gradually as the recovery part of the economic cycle nears its full potential and the long-term growth components--expansion in factors of production and increase in productivity--become more important.  
  • Continued growth worldwide ,articularly in the high-tech industries, the relatively low number of terror attacks and the macroeconomic policies provided the favorable background conditions for economic growth. The impact of the war was modest. 
     The government budget deficit was lower than the ceiling ,and public expenditure grew in line with its target. While the public debt to GDP ratio fell considerably ,its level was still high .An increase in defense spending following the war sharpens the challenges faced by fiscal policy.  
  • The consumer price index fell by 0.1 percent this year ,that is inflation significantly deviated below the lower boundary of the target range. The sharp appreciation of the shekel, influenced by the dollar's global weakness, greatly contributed to this deviation, which occurred in the second half of the year.  
  • As a response to the sharp fall in prices which began in September ,the Bank of Israel reduced the interest rate by a cumulative 1.5 percent in the last quarter of 2006 and the beginning of 2007 .This followed the rise in the interest rate at the beginning of the year, when inflation exceeded the target range.  
  • Long-term forces are acting to increase the current account surplus, though the sharp increase of the surplus this year was mainly affected by one-time factors.  
  • The resilience of the banking system improved ,though that of insurance companies declined .It is important to step up the regulation of institutional investors ,particularly the insurance companies  
  • The low employment rate in certain segments of the population and the low incomes of workers with poor levels of education are central causes of poverty .It is recommended that a number of steps be taken to increase employment and the earning potential of these populations ,including an earned income tax credit system in line with the government's decision, and a cut in the number of foreign workers.  

 

The Economy and Economic Policy - Full File