Recent Economic Developments, 113

15/05/2006
All Press Releases In Subject:
The Economy and Economic Activity

Recent Economic Developments, 113

Overview:

An analysis of economic developments in Israel in the period reviewed—2005:IV and 2006:I1—attests to the continued expansion of real activity, as well as to the creation of inflationary pressures, raising fears that the rate of price increases will accelerate. On the real side, the rapid growth rate that has characterized the economy in the last two and a half years persisted (this includes 2005, when GDP rose by 5.2 percent and per capita GDP by 3.3 percent—among the highest growth rates in the west). The expansion was led by the business sector: during the period reviewed growth accelerated in manufacturing and the services, and a rally was evident to some extent in construction. The continued growth process in the period reviewed was expressed in positive trends in the labor market, stability in the financial markets, high yields on the stock exchange and a significant increase in trade volumes. The unemployment rate continued to decline and reached 8.8 percent, despite the increase in the number of foreign workers and continued rise in the participation rate. Positive indicators of economic activity are also in evidence from an analysis of the Companies Survey for 2006:I, which revealed an increase in activity encompassing all the principal industries, including construction, and the leading index of the Survey predicts a continued increase in business sector activity in the coming quarter. However, Israel’s foreign trade data show that there was a slowdown in the period reviewed, in both goods exports and imports. On the nominal side, the persistent rise in domestic demand, local-currency depreciation, energy price-rises, and convergence towards Israel’s production potential led to the acceleration of the rate of price increases and inflation expectations. The rise in the CPI (Consumer Price Index) for February was especially high (0.6 percent), as was that for March (0.3 percent), in comparison with both the forecast increases (0.2 and 0.1 percent respectively) and the equivalent months in previous years. In the last twelve months (March 2006 vis-à-vis March 2005) the rate of price increases deviated from the target (1-3 percent a year) for the first time in many years and stood at 3.6 percent at the end of March. All these developments, together with the narrowing spread between local-currency and dollar interest rates, led the Bank of Israel to gradually raise the interest rate in 2005: IV and 2006:I, after about eight months in which it had remained unchanged.

Link to File