Recent Economic Developments, 87

01/08/1999
All Press Releases In Subject:
The Economy and Economic Activity
Recent Economic Developments, 87, January 1999 - June 1999


 Main Developments
  The Principal Industries
   The Labor Market
    The Balance of Payments
     International Developments
       and Their Effect on Israel
        Prices
         The Public Sector
          The Money and Capital Markets



Previous Economic Developments 86


Main Developments

In the first half of 1999 (the period reviewed), economic activity continued at the low level which has characterized it in the last few years, but this time it was led by a reduction of exports and a low level of domestic demand. The rate of price increases declined sharply, in part representing a partial and one-time compensation for the exceptional price rises of 1998:IV, so that the inflation environment at the end of the period reviewed was similar to that in the first half of 1998. There was a deterioration in the balance-of-payments current account, and imports continued to grow, with an accumulation of inventory; the government deficit deviated significantly from the path determined in the Deficit Reduction Law; monetary policy continued to act towards maintaining the reduction in the inflation environment; and against the background of the moderate level of real activity, calm returned to the financial markets (albeit with a rise in the stock market). The exchange rate showed gradual appreciation, and following significant capital outflow in the second half of 1998, the direction of capital flow, particularly long term, reversed, and became an inflow. Towards the end of the period reviewed, there were some signs of increased economic activity, but it is still too soon to state that they indicate a recovery trend.

In view of Israel’s integration into the world economy, macroeconomic developments in the period reviewed are closely bound up with international economic developments: the slowdown in the rate of growth of world trade in 1998, and its continued moderate rate of growth in 1999 had an adverse effect on Israel’s exports, and hence on industries not directly connected with exports. The fall in world prices, which led to a reduction in prices of goods imports and exports and to an improvement in the terms of trade, contributed to reducing the increase in the current-account deficit, and also to a moderation of price increases. The growth of world capital flows, accompanied by reduced interest rates and continued increase of nonresidents’ direct investment in Israel, played a role in reversing the direction of capital flows from outflow to inflow to Israel.

In the period reviewed, the Consumer Price Index (CPI) fell - in contrast to its significant rise in 1998:IV - by 0.7 percent, in annual terms. The sharp change, which essentially had not been foreseen, encompassed all the items in the index, with the change in housing prices being the most marked. Price indices adjusted for seasonality rose moderately in both quarters in the period reviewed, and this stability, combined with the fact that monthly indices in the period were relatively low, may indicate that the rate of inflation is returning to that which prevailed in the first half of 1998. Inflation expectations derived from the capital market, however, indicate a higher rate of inflation during most of the period reviewed, a rate which declined notably only towards the end of the period.

In the period reviewed, several trends were evident indicating a rise in the current account deficit in the balance of payments. In 1999:I the deficit increased by $ 0.8 billion; the trade deficit rose to a monthly average higher than that in 1998, despite a continuation of the improvement in the terms of trade: goods exports declined by 4 percent from their level in the equivalent period in 1998, the decline embracing all the export industries, including the high-tech industries which had led export growth in the last few years. In 1999:II, signs of recovery in exports were evident, reflected also in the trend data; this was apparently the effect of positive developments in the world economy, and possibly also of a reaction to the real depreciation of the NIS in 1998:IV. Imports of production inputs, which had fallen in 1999:I, rose in 1999:II, possibly indicating expansion of current activity; imports of capital goods, which also increased in 1999:II, may suggest that manufacturers expect activity to continue expanding. The exchange rate, which reflected sharp depreciation in the second half of 1998, appreciated in the period reviewed, although it compensated for only a part of the depreciation. Although there was greater uncertainty in 1999:II, prior to the General Election, and the yield differential between Israel and abroad contracted, the exchange rate remained within the crawling band, with small fluctuations, and the Bank of Israel did not intervene in the foreign-exchange market.

The long-prevailing slackness in the labor market continued. The labor force increased by more than the rise in the number of employed persons, and the numbers of unemployed, those seeking work, and claimants for unemployment benefit all went up. The real wage, which had declined in the second half of 1998, rose in the first half of 1999, reaching the same level as in the equivalent period in 1998. It seems that parallel with the slump in demand, another factor contributing to the increase in the rate of unemployment was the decline in public-sector employment in 1999:I, following its rise in 1998 - which at that time had reduced the rise in the rate of unemployment. The real wage rose moderately in the business sector, and declined in the public services (due inter alia to the fact that wage agreements for 1997 and 1998 have not yet been implemented). Data of unemployment indicate that it has deepened, and the rise in the real wage, the rise in the minimum age, and the payment of the cost of living supplement during the period reviewed apparently did not help to alleviate it.

Public consumption remained stable in 1999:I, and in the public sector the number of employed persons and the real wage fell; on the other hand, the Accountant-General’s estimate indicates that the domestic budget deficit in the period reviewed rose to NIS 5.4 billion. These two developments have opposing effects on economic activity. In the period reviewed, income fell short of the forecast (partly due to the nonfulfillment of the forecast enhancement of tax collection). With this in mind, and assuming that the budget will be adhered to more strictly during the rest of the year, that inflation will be about 4 percent, and that the wage agreements will be implemented, the domestic deficit for the year as a whole is expected to deviate from that planned by some NIS 4–5 billion. Tax revenues went up by one percent in real terms in the period reviewed, and transfer payments to households by about three percent, while there was no change in unemployment benefits despite the rise in unemployment.

Monetary policy: following the sharp price increases in 1998:IV and concern that these may become rapid inflation, in November the Bank of Israel raised the interest rate by a cumulative 4 percentage points, and it remained unchanged until February 1999, with the Bank pursuing its strategy of nonintervention in the foreign-currency market. Thereafter, when indicators of the inflation environment suggested that inflation was gradually converging to a rate compatible with the target of 4 percent, the rate of interest was cut by half a percentage point in each of the next three months, and in May it settled at 12.9 percent. In that month, the real interest reached 5.7 percent, and in June, with the decline in inflation expectations, it rose to 6.7 percent. In setting monetary policy for August, with the further fall in inflation expectations to an environment slightly above 4 percent, as well as other indicators, the Bank of Israel announced a 0.5 percentage point cut in the interest rate. In the capital market the share price index rose rapidly in the period reviewed, as it did in many capital markets throughout the world. By May the index had risen by 30 percent, with all industries participating in the rise. Turnover also increased gradually, although the extent of new issues remained relatively low.
 

Figure 1. State-of-the-economy index (average 1994=100)
Figure 2. Industrial production (index, average 1994=100)
Figure 3. Interest and the inflation environment
Figure 4. Housing starts and completions, and relative price

 
Table 1. Indicators of Business Activity, 1997-99
(all data, excluding construction are seasonally adjusted)


1998
1999
Jan-Junea
*

1997
1998
II
III
IV
I
II
1998
1999
Rates of change (annual average, percent), compared with preceding quarter
State-of-the-economy
index

5.0 3.0 5.1 -0.7 1.1 -0.1 -1.7 5.9 -0.9 6
Large-scale retail trade 8.4 6.2 19.9 -8.1 7.4 9.5 -4.1 7.0 3.7 6
Manufacturing production (excl. diamonds) 1.9 2.8 2.8 0.0 1.7 -5.8 -1.4 2.9 -0.7 5
Business-sector consumption
of electricity
4.4 2.6 60.1 -26.2 8.0 -4.4 -19.2 1.2 -2.4 5
Index of revenue
in commerce
4.7 0.8 1.0 2.7 -2.3 29.4 6.9 2.4 6.4 4
Index of total revenue 4.6 3.6 5.4 -2.0 10.4 -4.9 -1.4 4.3 1.4 5
Rates of change (percent), compared with preceding quarter
Tourist arrivals -6.0 -4.7 19.4 -5.3 -2.2 7.9 0.2 -11.1 12.4 5
Immigrant arrivals -5.4 -15.4 -8.9 21.7 14.5 -16.9 5.6 -8.6 12.6 5
Residential starts -9.9 -21.2 -16.3 14.5 5.7 -26.8 -66.2 -27.4 -46.0 4
of which:
 Public sector
-18.0 -44.4 -41.0 10.0 -20.6 -4.8 -62.0 -40.1 -57.4 4
Residential completions 21.7 -21.6 16.3 -10.4 -12.9 -5.7 -69.6 -13.0 -48.4 4
of which:
 Government-initiated
36.4 -22.7 40.2 -9.7 -26.2 39.7 -78.1 -22.0 -33.7 4
Survey of companies (percent)b
Product of manufacturing
firms (not adjusted)
-3c -8 -10 -6 -1c -8 5c

6
Product of manufacturing
firms (adjusted)
-3c -8 -9 -15 -2c 1c 6c

6
Sales by commercial
firms (not adjusted)
-12c -13c -14c 13c -28 3c 9c

6
Sales by commercial
firms (adjusted)
-12c -13c -8c -10c -14c 10c 8c

6
*
Last month for which data available.
a
Compared with same period in preceding year.
b
Difference between the number of firms reporting a rise and those reporting a fall, as a percentage of all reporting firms.
c
Denotes non-significant result at 5 percent level.

Contents



The Principal Industries

Most of the indicators referred to below which serve to assess economic activity show that the low level of activity evident since 1996 continued in the period reviewed. However, it seems that in 1999:II there were indications of some rise, but it is still too soon to determine whether this is a trend towards recovery or another fluctuation around the previous level.

On the sources side of the National Accounts data, in 1999:I there was a rise of 1.3 percent in GDP (in annual terms, seasonally adjusted) - which means both a reduction in per capita GDP and a growth rate below that of potential GDP; an increase of 2.5 percent in domestic business-sector product; and a rise of 1.8 percent in goods and services imports. On the use of resources side, private consumption remained constant, and public consumption expanded by one percent (meaning a decline in total per capita consumption; goods and services exports went down by 2 percent, with the growth of investment providing the explanation for the increase in business-sector product. Private-sector investment in fixed assets and in residential construction declined, while in contrast inventory and investment in imported machinery and equipment rose markedly. The increase of inventory despite the prevailing high rate of interest does not itself indicate a turnaround in the level of economic activity in 1999:I.

Replies from firms participating in the Bank of Israel three-monthly Survey of Companies indicate some measure of recovery in the primary industries in 1999:II, with the exception of construction. Manufacturing companies reported some rise in output, exports, and export orders. The increase in output occurred mainly in the large manufacturing companies; commercial firms reported higher sales, following declines since 1996; reports from transport and communications firms also indicate increased activity, and a marked recovery in hotels, after a long period of reports of reduced bookings. Despite these signs of recovery, companies in all industries reported that weak domestic demand was the main cause of their restricted activity.

The indicators in Table 1 point to non-uniform changes in activity in the principal industries during the period reviewed. The index of manufacturing production till May was 0.7 percent lower than in the equivalent period in 1998; retail trade, which rose by about 9 percent in 1999:I, fell in 1999:II; in commerce, too, there was a slowdown in 1999:II; imports of production inputs declined in 1999:I to their lowest level for a long time, but expanded considerably in 1999:II, and the State-of-the-Economy Index declined by about one percent from its level in the first half of 1998.

In the period reviewed, the output of most of the export-oriented industries which set the pace for manufacturing industry fell below its average level in 1998. Output of machinery and equipment, of base metal and electronic equipment dipped by between one and two percent, and that of chemicals rose by about one percent. (The geographic distribution of exports by destination is discussed in the section on the balance of payments.) The low level of construction activity was reflected in the mining industry, too, where output dropped by three percent. Clothing and textiles output, whose share in GDP has been falling steadily in the last few years, declined by two percent in the period reviewed.

Most indicators of activity in the construction industry show that the fall evident in 1998 continued in the first half of 1999, and even intensified: building starts and completions, both those initiated by the public sector and those by the private sector, fell significantly; apartment sales by the ten largest construction companies fell; the area of construction for all purposes (especially that of the private sector) contracted; construction time increased; sales of land for residential construction fell; fewer mortgages were taken (although some of the fall is a correction of the bringing forward of purchases and realization of government aid at the end of 1998); and the number of apartment sales (according to purchase tax and land betterment tax data) was lower than that in the equivalent period in 1998. Nevertheless, from January to April, 5,100 new apartments were sold, compared with 4,500 in the same period in 1998; the stock of apartments under construction contracted, and apartment prices (according to the survey of apartment prices) rose by 3.7 percent in 1999:I, but fell by 1.2 percent in April.

The sales revenue index of all commercial and service industries (according to VAT data, seasonally adjusted) fluctuated widely in the last twelve months, and its average level in the period reviewed was the same as in the first half of 1998. The number of tourist arrivals, which had fallen during the last two years to an all-time low in 1998:I (seasonally adjusted), rose in the period reviewed to a level 12 percent higher than in the first half of 1998. An analysis of tourist arrivals by air shows that the average monthly number has been constant at 135,000 for about a year.
 

Figure 5. Tourism (index, average 1989=100)
 
Table 2. National Accounts, 1997-99
(seasonally adjusted)


1998
1999
Jan-Junea
*

1997
1998
II
III
IV
I
II
1998
1999
Rates of change (average annual rates, percent, constant prices), compared with preceding quarter
GDP 2.7 2.0 4.3 0.8 0.1 1.3
1.5 1.6 3
Business-sector product 2.6 1.8 4.5 -0.2 -1.3 2.5
1.3 1.3 3
Private consumption 4.1 3.3 7.6 1.5 -0.4 0.1
3.5 2.2 3
Gross domestic investment -6.1 -7.6 -34.3 35.0 11.1 21.1
-1.8 4.5 3
Goods and services exports 7.6 6.0 26.1 -12.7 6.3 -1.9
3.3 3.5 3
Goods and services imports 2.8 2.1 9.0 2.5 4.7 1.8
1.7 4.5 3
Public-sector product
1.9 2.3 5.6 1.7 3.3 1.1
0.3 2.9 3
*
a
Last month for which data available.
Compared with same period in preceding year.

Contents



The Labor Market

The slackness in the labor market - resulting after a certain lag, from the low level of economic demand - continued. Various indicators show, however, that in 1999:I the public sector was responsible for more of the rise in unemployment than the private sector. (This contrasted with their relative contributions in 1998, when employment in the public sector expanded considerably.) In 1999:I, the number of unemployed persons rose by 8.6 percent, but data of the monthly trend as estimated by the Central Bureau of Statistics (CBS) show that the rate of unemployment has been rising gradually during the year, reaching 8.8 percent in April–May. The number of workseekers also rose in the period reviewed, together with the number of claims for unemployment benefit. The real wage, which had fallen in the second half of 1998, rose again to its level in the first half of 1998. The number of employed Israelis increased by only 5,000 in 1999:I, whereas the labor force increased by four times that number (seasonally adjusted data).

In 1999:I, labor input (including foreign workers and workers from the Palestinian Autonomy and the administered areas) was at the same level as in the previous quarter (seasonally adjusted). There was a 1.1 percent increase in the business sector, and a reduction in the public sector. The number of Israeli employees in the business sector rose by 0.9 percent, while in the public sector it declined by 1.1 percent.

In the course of 1998, the government introduced measures intended to help reduce unemployment (e.g., providing the unemployed with vocational and retraining courses), the implementation of the criteria for receipt of unemployment benefit was tightened, and many workers were taken on in the public services (especially in the second half of the year). In 1999:I, the public sector stopped taking on workers, and their number, although still 4.5 percent (20,000 workers) more than in 1998:I, went down by 1.1 percent from its level in the previous quarter. Concurrently, the number of Israeli employees in the business sector increased by 0.9 percent, with a rise in manufacturing (6.9 percent), in financial and business services (3.2 percent), and a reduction in construction (8.9 percent).

The real wage per employee post, which rose steadily in the period reviewed, reached its level of a year earlier in 1999:II (April). Its low level in the public sector may be due to the delay in signing of the wage agreements for 1997 and 1998, some of which are expected to be signed during the year. The reversion to the real wage level of the second half of 1998 was accompanied by a 1.1 percent increase in the business-sector wage, while that in the public sector fell (by 2.2 percent up to March).

In January, an advance on the cost of living allowance (COLA) was paid, and through it, henceforth pension fund annuities were updated by 6.4 percent. In March there was a four-day strike in the public services, with a sympathy strike in public-sector companies and in parts of the business sector. (The days of the strike were not deducted from salaries but from holiday entitlements, so that they cannot be linked to the real reduction in public-sector wages.) The strike ended when agreement was reached in principle on a wage accord for 1997 and 1998. Making certain assumptions about wage drift, the significance of the wage agreements is a nominal rise of 8 percent; as details of the agreement have not yet been settled, however, the agreement has not been implemented. In April, the minimum wage was increased by 6.4 percent, to NIS 2,798. In May, an agreement transferring public-service workers from noncontributory to contributory pensions, and in June a special collective agreement covering nurses was signed for 1998 (granting a 6.9 percent wage increase).

The immigrant population (those who arrived in Israel since 1990) reached 900,000 in 1999:I, after their number had risen by 12.6 percent in January–May compared with the equivalent period in 1998. The number of those arriving as immigrants, excluding those who changed their status from tourist to immigrant, rose by 30 percent. Immigrants’ share of the labor force, which is on a gradually rising trend, reached 16.4 percent in 1999:I, immigrants’ participation rate in the labor force and their unemployment rate remained higher than those of the veteran population (54.4 percent and 9.6 percent compared with 53.3 percent and 8.5 percent respectively).

In 1999:I, the number of jobless reached 200,000 (seasonally adjusted), a rise of 14 percent from the previous quarter, the total increase being among men. The characteristics of the unemployed indicates that unemployment deepened from the last quarter of 1998: the share of the young among the unemployed fell considerably, and reached its lowest level for several years; the number of married workseekers increased; and the length of time they were looking for work increased. Concurrently, in 1999 the number of those refusing offers of work - which had surged in 1998 - fell (affected by the more stringent application of the criteria for receiving unemployment benefit).

Data of the National Insurance Institute regarding claims for unemployment benefit indicate that in the period reviewed there was a renewal of the upward trend; this had declined each month in the second half of 1998, and since February has been rising constantly, with the share of first-time claimants increasing.


 

Figure 6. The labor market (thousands)
Figure 7. Real wage per employee post (NIS, 1995 prices)

 

Table 3. Indicators of Labor Market Developments, 1997-99
(seasonally adjusted)


1998
1999
Jan-Junea
*

1997
1998
II
III
IV
I
II
1998
1999
('000s)
Civilian labor force 2,208 2,270 2,254 2,276 2,293 2,312
3.5 2.5 3
Israelis employed 2,041 2,077 2,046 2,092 2,108 2,113
2.1 2.3 3
   Business sectorb
1,445 1,446 1,437 1,451 1,458 1,470
0.9 2.2 3
   Public sectorb 596 630 615 636 649 642
4.3 3.4 3
Average hours worked
per employee
b

38 37 37 37 37 37
-1.3 -1.3 3
Claims for
unemployment benefit
96 108 111 110 105 108 110 18.4 0.3 6
Work seekers 143 157 164 155 152 156 160 16.0 -1.0 6
Real wage per employee post (NIS)c 4,390 4,489 4,511 4,502 4,441 4,481 4,506 3.5 0.1 4
   of which: Business sectorc
4,419 4,547 4,599 4,565 4,478 4,568 4,663 4.9 1.1 4
Unemployment rate (%) 7.5 8.5 9.2 8.1 8.1 8.6


3
*
Last month for which data are available.
a
Percent change compared with same period in preceding year.
b
Not seasonally adjusted.
c
At January 1995 prices.

Contents
 

 

The Balance of Payments

In 1999:I the current-account deficit was $ 0.8 billion, compared with $ 0.5 billion in 1998:I, and was financed by capital transfers from abroad to a similar extent as in 1998 - $ 0.4 billion - as well as by foreign direct investment of $ 1.1 billion ($ 1.8 billion in 1998) and investment by residents abroad, which declined by $ 0.5 billion. The implicit capital inflow of the private sector was $ 782 million in 1999:I, about $ 0.25 billion above the quarterly average in 1998.

The trade deficit, which expanded in the second half of 1998, continued to grow in the period reviewed, alongside a rise in goods imports (after remaining stable for a year) and a fall in exports (whose average level was 4 percent below that of the equivalent period in 1998). In 1999:I prices of goods imports fell by 2.8 percent, continuing the decline in prices that had begun in 1996, and export prices dipped by 0.5 percent, so that there was a 2.3 percent improvement in Israel’s terms of trade, offsetting more than a third of the quantitative rise in the import surplus in this quarter.

Imports of intermediates, serving as one of the indicators of current economic activity, were down by 3 percent in the period reviewed over the equivalent period in 1998, but there is a marked difference between the two quarters. Whereas in 1991:I the continuous quarterly (2.4 percent) decline in imported intermediates evident since the beginning of 1998 persisted, in 1991:II there was a trend shift and a relatively steep (4.6 percent) rise. Concurrently, there was a 14 percent increase in imports of capital goods - constituting an indicator of future economic activity - most of it in 1999:II. Imports of consumer goods were similar in extent to 1998:II, but lower than in 1999:I (Table 4).

Manufacturing exports (in current dollars) declined by 4 percent in the period reviewed relative to the equivalent period in 1998; this decline encompassed most industries, and led the continued economic slowdown. It was particularly marked in the high-tech industries, which had led exports in the last few years (including machinery and equipment - 17 percent, electronic components and computers - 9.9 percent, and engines and electrical equipment - 9.9 percent), as well as in the quarrying and mining and food and beverages industries, whose exports dropped by 18 and 16 percent respectively. As with imported intermediates, in high-tech industry there was a marked difference between the two quarters of the period reviewed. While there was a relatively sharp drop in the exports of all industries in 1999:I, this moderated in 1999:II, even rising in some industries.

Diamond exports, which had suffered as a result of the East Asian financial crisis, recovered in the period reviewed, and were up by 4 percent over the equivalent period in 1998. The destinations of total goods exports (excluding diamonds) altered slightly: exports to the EU and the countries of South-East Asia, which had declined in the second half of 1998, rose once more, although this did not apply to Japan, while exports to North America were down by $ 300 million from the second half of 1998.

No exceptional activity in the foreign-currency market was recorded for households, even though all restrictions on foreign-currency accounts, unilateral transfers, and capital exports by residents were removed in 1998. This indicates that the cancellation of controls on foreign-currency financial assets was not the reason for the rise in these holdings, this being determined by considerations of economic benefit as expressed in the expected yield on these assets (net of tax) compared with the risk implicit in them. There was, however, a sharp change in the extent of foreign-currency credit taken by a few Israeli companies for financing leveraged buyouts and infrastructure investment, and this decline served to bring about a trend shift in capital flows. In the first half of 1999 capital inflow amounted to $ 1.7 billion compared with outflow of $ 0.7 billion in the second half of 1998. Even in comparison with the more distant past, when there was net capital inflow, there is a marked change in the composition of capital flows. After most capital inflow in previous years was short-term, in the period reviewed most of it consisted of long-term credit.

The difference between the behavior of households and of large companies can be attributed inter alia to the events of October 1998, which made the former more aware of exchange-rate risk. Thus during the period reviewed the process of accumulating foreign-currency deposits (in Israel and abroad) continued, the share of foreign-currency credit declined, and purchases intended to hedge against exchange-rate risk rose; consequently the business-sector’s exposure to depreciation (derived from the surplus of foreign-currency liabilities over foreign-currency assets) continued to decline until April.

During the period reviewed the shekel appreciated against both the dollar and the currency basket, although not sufficiently to fully offset the nominal depreciation of the second half of 1998 (Table 6). Indicators of the behavior of the real exchange rate (including the indices of import and export prices in terms of the GDP deflator, the purchasing price index - PPP - and the index of prices of tradables relative to that of nontradables in the CPI) show that, after considerable volatility during the last year, it stabilized in 1999:I at a level slightly above that of 1998:IV, i.e., between 0.4 and 3.1 percent, meaning that there was slight real depreciation. The Bank of Israel continued with its strategy of nonintervention in the foreign-currency market, and no foreign-currency transactions were recorded in its trading room. The Bank’s foreign-exchange reserves declined during the period reviewed, reaching some $ 22 billion at the end of June - $ 0.7 billion below their level at the beginning of the year. The entire decline in the reserves is explained by the depreciation of some of the currencies in which they are held vis-a-vis the dollar, in which they are all denominated.

1 The definitions of the current account and its financing have been changed; capital inflow now includes migrants’ transfers (formerly recorded on the credit side of the current account), while import of tourism services has been considerably reduced as residents who are domiciled abroad have been removed from the statistics (following a CBS survey of outgoing tourism).


 

Figure 8. Foreign trade ($million per month)
 

Table 4. Balance of Payments, Foreign Trade, and the Reserves, 1997-99
($ milllion, current prices)


1998
1999
Jan-Junea
*

1997
1998
II
III
IV
I
II
1998
1999
Monthly averages
Trade deficit 465 363 318 399 374 413 410 339 411 6
Goods imports 1,775 1,769 1,772 1,768 1,770 1,764 1,806 1,770 1,785 6
   Consumer goods 322 322 317 332 313 332 311 322 321 6
   Capital goods 381 378 380 372 408 409 425 366 417 6
   Intermediates 1,072 1,069 1,075 1,064 1,048 1,023 1,070 1,083 1,047 6
Goods exports 1,310 1,406 1,453 1,369 1,396 1,351 1,397 1,431 1,374 6
   Industrial 1,241 1,337 1,380 1,294 1,333 1,290 1,329 1,361 1,309 6
Quarterly averages
Net current account -850 -167 -292 -1,023 1,138 -809
-902   3
Long- and medium-term
capital flows
1,362 878 566 322 449 1,401
1,531   3
   of which: Private sector 1,057 594 707 533 282 1,289
1,048   3
Short-term capital flowsb 988 -504 -1,266 136 -520 -286
-748   3
   of which: Private sectorb 1,000 -498 -1,277 190 -563 -277
-714   3
Net foreign debt (% of GNP) 14.73 12.50 14.37 14.11 12.50 12.08
21.88   3
End-period Bank of Israel reserves 20,332 22,674 21,322 21,715 22,674 21,983 21,931 21,322 21,931 6
*
Last month for which data are available.
a
Foreign trade data are seasonally adjusted monthly averages (excluding ships, aircraft, diamonds, and fuel).
b
Including the banking system.

Contents
 

 

International Developments and Their Effect on Israel

Macroeconomic estimates by various entities, including the IMF, point to several positive developments in the global economy, alongside some negative ones. These conflicting effects were expressed in the relative stability of the growth rate forecast for 1999 and the acceleration of that forecast for the year 2000 (Table 5).

Among the reasons for the lower forecast are the weakening of the financial sector in some emerging markets (including China), the delay in introducing stabilization and reform measures in Russia, the continued low level of economic activity in Japan, and the crisis in Brazil (which, despite the slackening of its influence on financial markets and its increased stability, still had a contractionary effect on the global economy). Factors which had a positive influence include the expansion of activity in some Asian markets - Korea, Malaysia, and Thailand - the abatement of fears of deflation, leading to the rapid expansion of credit, the reduction of the cost of raising capital by emerging markets (due to the lower country risk premium), and the rise in investment in them. Additional causes were the relaxation of monetary restraint in the advanced economies in 1998 and the new peaks attained in many stock markets (excluding Europe). Furthermore, economic growth in the US was relatively rapid, and inflation fell in most countries, including those in which activity had come close to attaining economic potential.

Data from other entities, including J.P. Morgan, involved in forecasting world economic developments, indicate a more rapid recovery than was evident in the first half of 1999, encompassing both advanced and emerging economies (particularly those of Asia and South America).

The global macroeconomic estimate for 1999 as a whole is favorable for Israel as regards both economic activity and the disinflationary process. According to this estimate, global trade will expand, with imports rising faster than in 1998 in both advanced and developing countries; exports from advanced countries will slow, while those from developing countries will accelerate; prices of commodities - especially fuel (after declining in January and rising in February) will continue to decline, and this will have a positive effect on Israel’s terms of trade and help to reduce inflation; short-term interest rates will decline, serving to bring domestic interest rates down.


 
Table 5. Indicators of Economic Development in Advanced and Developing Countriesa, and Estimate for 1999-2000


1997 1998 Estimate
1999
Forecast
2000
Annual rate of changeb
World GDP
   Total 4.2 2.5 2.3 3.4
   Advanced countries 3.2 2.2 2.0 2.3
   Developing countries 5.7 3.3 3.1 4.9
World trade
   Total 9.9 3.3 3.8 5.8
   Advanced countries
      Imports 9.1 4.7 5.0 5.7
      Exports 10.3 3.2 2.8 5.6
   Developing countries
      Imports 11.2 -0.7 2.6 6.8
      Exports 11.4 2.2 4.6 5.5
Inflation (CPI) </TD<
   Advanced countries 2.1 1.6 1.4 1.7
   Developing countries 9.4 10.4 8.8 7.5
Commodity prices
   Fuel -5.4 -32.1 -8.3 13.4
   Nonfuel -3.3 -14.8 -4.0 1.8
Short-term interestc (%)
   Dollar deposits 5.9 5.6 5.2 5.2
   Yen deposits 0.7 0.7 0.2 0.3
   DM deposits 3.5 3.7 3.0 3.1
Unemployment rate
   OECD countries 7.5 7.2 7.1 7.0
a
According to "World Economic Outlook", Israel is classified as an advanced economy.
b
Apart from interest and unemployment rates, which are shown as percentages.
c
6-month LIBOR rate.
SOURSE: "World Economic Outlook", (IMF, December 1998) and OECD "Economic Outlook".

 
Contents
 

Prices

During the period reviewed the CPI declined by 0.7 percent (annual terms), compared with a rise of 4.5 percent in the equivalent period in 1998, and of 13 percent in the second half of 1998. This steep drop in price derives mainly from the partial and one-time offsetting of the accelerated increases at the end of 1998, and is the outcome of monetary policy, which served to prevent the one-time price rises from spilling over into a higher rate of inflation. The changes in all the items of the CPI were relatively moderate and considerably below their average rise in the second half of 1998 (Table 6). The lower rate of increase of the CPI began after October 1998, when it was at its peak. During 1991:I the rate of increase was negative every month, and for the quarter as a whole it was –5.5 percent in annual terms; in 1999:II the rate was positive, 4.3 percent. During the twelve months from July 1998 to June 1999 the inflation rate was 5.9 percent.

In each of the first five months of 1999 the forecasts of price increases by various economic entities were biased upwards; in addition, inflation expectations for twelve months ahead, as derived from the capital market, adjusted to the persistent overestimation of forecast inflation only at the end of the period reviewed. They rose gradually from March, reached 6.5 percent at the end of May, and declined for the first time only in the second half of June, after the May CPI had been published and following the general elections; this decline, which continued in July, brought the forecast closer to the annual inflation target of 4 percent. The Bank of Israel’s survey of companies also indicated a level of expectations that was higher than the target. According to reports from firms, inflation expectations for the coming year remained stable throughout the period reviewed (6.1 percent in 1999:I and 5.8 percent in 1999:II), similar to the rates obtained in surveys made in the equivalent period in 1998 (6.7 and 6.0 percent respectively).

Among the various components of the CPI the fall in housing (5.7 percent) is most marked, far outstripping the decline in the CPI as a whole and contributing 1.2 percentage points to its reduction. Housing prices fell even beyond the depreciation of the dollar, and during the period reviewed this development was one of the expressions of the ongoing crisis in the real estate industry.

During the period reviewed there was marked nominal local-currency appreciation against the currency basket (10.4 percent in annual terms), after even more sizable nominal depreciation in the second half of 1998; wholesale prices remained stable; prices of tradables fell by 0.8 percent, as did those of nontradables.
 


 
Table 6. Selected Price Indicies, 1997-99
(annual rates of change during period, percent)


1998
1999
Jan-June
*

1997
1998
II
III
IV
I
II
1998
1999
CPI 7.0 8.6 8.9 7.4 18.8 -5.5 4.3 4.5 -0.7 6
CPI excl. housing, fruit and vegetables 6.7 8.5 10.0 2.2 23.8 -1.4 2.7 4.6 0.6 6
CPI excl. housing, fruit and vegetables, controlled goods, clothing & footwear 7.8 8.8 4.4 6.1 22.6 2.9 2.2 3.7 2.6 6
Index of housing prices 7.5 8.8 3.9 13.1 13.4 -17.9 8.3 4.5 -5.7 6
Wholesale price index 5.9 8.2 4.1 0.6 31.7 -3.4 4.1 1.7 0.3 6
NIS/$ exchange rate 7.9 18.2 9.0 21.2 39.2 -13.2 5.9 7.5 -4.1 6
NIS/currency-busket rate
3.7 20.6 8.9 28.7 45.8 -20.2 0.6 6.2 -10.4 6
Change in terms of trade
(quarterly data)
1.9 0.6 -0.8 0.6 -0.8 2.3       6
*
Last month for which data are available.

Contents



The Public Sector

Public consumption was stable In 1999:I, as it was in 1998:IV (at constant prices, seasonally adjusted), after rising continuously each quarter for two years. Transfer payments increased by a real 1 percent, after rising by 9 percent in 1998. In 1999:I public-sector employment declined, after soaring in the second half of 1998.

The Accountant-General’s estimates, which are based mainly on cash data, indicate that in the first half of 1999 the domestic budget deficit was NIS 5.4 billion - about half the amount planned in the budget proposal for the whole year (NIS 10.4 billion). However, taking into account the distribution of budgetary activity over the year in the past, and making other assumptions (adding retroactive wage increments to expenditure and taxes on them to income), the deficit till now appears to be deviating by NIS 3 billion from a path that is in line with the annual deficit target. This deviation derives from a significant shortfall on the income side. Assuming that there is a significant tightening of the fiscal stance in the second half of the year relative to expenses in the first half (as occurred in 1996) - so that annual expenditure does not exceed the budget less the inflation reserve - it would seem that during the year as a whole the domestic deficit is expected to deviate from the target by between NIS 4 billion and NIS 5 billion (as a percentage of GDP). The calculation also indicates that only a small part of the shortfall in income reflects a lower level of activity than that used as the basis for preparing the budget, and that most of it derives from a structural overestimation of tax receipts.

The domestic deficit, including the government, the Bank of Israel, and the Jewish Agency, amounted to 2.8 percent of GDP in the period reviewed, compared with 1.8 percent of GDP in the equivalent period in 1998; the explanation lies in the decline in the government’s income and rise in its expenses. The financing of the domestic deficit was divided equally between government injection and net borrowing from the public, mostly through sales of bonds and deposits (during this period there was no income from privatization).

In real terms, total government tax receipts, according to the State Revenue Administration figures (accrual basis), were up by approximately 1 percent over the equivalent period in 1998 in the period reviewed, during which there were marked shifts which could indicate a change in the level of economic activity. Direct taxes, which fell by 3 percent in 1999:I, rose in 1999:II, so that the total real amount of tax receipts remained unchanged; domestic VAT receipts (gross) were up by 4 percent in 1999:I and by 6 percent in 1999:II; on the other hand, import tax receipts, which rose by 11 percent in 1999:I, fell by 4 percent in 1999:II. Transfer payments to households, by contrast, rose by 3 percent in real terms (until May), outstripping the increase in the real wage. In real terms, unemployment benefits remained unchanged in the period reviewed, despite the rise in unemployment, and this is apparently due to the more stringent application of eligibility criteria for receiving these payments.
 

Figure 9. Government cash flows (NIS million, monthly average)
 
Table 7. The Budget and its Financing, 1997-99
(cash flows, as percent of GDP)


1998
1999
Jan-June
*

1997
1998
II
III
IV
I
II
1998
1999
1. Government domestic expenditure 39.4 39.2 36.5 37.0 42.9 39.1 37.9 38.3 38.5 6
2. Government receipts 36.5 35.9 34.8 35.2 35.0 37.5 34.0 36.8 35.7 6
3. Domestic budget deficit (1)-(2) -2.9 -3.3 -1.7 -1.9 -7.9 -1.6 -3.9 -1.6 -2.8 6
4. Domestic deficit of public-sector
(incl. Jewish Agency)
a  (5)+(6)
3.3 3.7 2.2 2.6 8.2 2.3 3.3 1.8 2.8 6
5. Government net borrowing from the public 2.3 2.8 1.5 2.6 5.5 0.5 2.7 1.4 1.6 6
6. Public-sector injection (9)-(8)-(7) 1.0 0.9 0.7 0.1 2.7 1.8 0.5 0.4 1.2 6
   7. Bank of Israel injection
-6.6 -1.1 0.1 2.6 -4.0 1.7 -2.4 -1.5 -0.3 6
   8. Private-sector foreign-currency conversions 6.7 0.3 -0.1 -0.2 -0.1 -0.4 0.1 0.8 -0.2 6
   9. Change in monetary base
1.1 0.1 0.6 2.4 -1.4 3.2 -1.8 -0.4 0.7 6
* Last month for which data available.
a Budjet deficit plus Jewish Agency injection, plus non-budgetary injection.


Contents
 

 

The Money and Capital Markets

In the wake of the accelerated price increases of October and November 1998 which occurred against the backdrop of global financial crises, and in view of apprehensions that these increases would be entrenched as a higher inflation rate, the effective nominal interest rate of the Bank of Israel was raised to 14.5 percent in November 1998 and remained unchanged until February 1999. The gradual decline in inflation expectations was reflected by the equivalent increase in the Bank of Israel’s expected real interest rate, and reached 8.6 percent. Starting in March, when the indicators of the inflation environment were that this was on a track that would enable the attainment of the target, the Bank of Israel reduced the interest rate for three successive months by 0.5 percentage points each time, and in May it stabilized at 12.9 percent. In the same month, when the elections were held, fiscal uncertainty increased, the domestic-foreign interest-rate spread narrowed, and exchange-rate risk rose, so that demand for foreign currency grew. Concurrently, there was local-currency depreciation and inflation expectations rose, so that the real interest rate fell to 5.7 percent. The interest rate remained unchanged in June and July, and when inflation expectations continued to decline to an environment slightly above 4 percent the Bank of Israel announced in its monetary program for August that its key interest rate would be reduced by another 0.5 percentage points.

Apart from inflation expectations, progress in the disinflationary process was expressed in low Consumer Price Indices - three of them negative at the beginning of the year - reflecting a partial and nonrecurring adjustment of the exceptional price increases towards the end of 1998.

During the period reviewed the exchange rate varied in a relatively narrow range within the band. The fact that the exchange rate remained near the midpoint rate accorded the Bank of Israel greater flexibility in managing monetary policy. The first interest-rate reduction in February did not have a substantial effect on the behavior of the exchange rate, and this was also the case in March; in April - when another interest-rate reduction was announced, the domestic-foreign interest-rate spread narrowed, and uncertainty increased due to the approaching elections - the shekel depreciated by 3 percent, although this was completely offset later in the period reviewed.

The monetary base expanded by 8 percent (annual terms) during the period reviewed - by less than in the three preceding years - and there was a similar increase in M1. This moderate rise in M1, which was influenced by tight monetary policy, is consistent with an annual inflation environment at the target level. However, the 14 percent increase in M1 in the last twelve months appears to above the level required to attain the inflation target. The other monetary aggregates rose relatively rapidly: the increase in local-currency deposits (mainly short-term) and Treasury bills by far outstripped the moderate rise in M1, and the M2 aggregate expanded by 32 percent during the period reviewed. Two developments concerning the monetary aggregates could indicate that public confidence in the disinflationary process has increased: the first is the 16 percent decline in total long-term CPI-indexed deposits, vis-a-vis the 36 percent increase in long-term unindexed deposits; the second is the smaller rise in deposits indexed to and denominated in foreign currency than in unindexed deposits.

The stock market surged once again during the period reviewed. The general share-price index rose by 30 percent (until the end of May), completing a rally of over 40 percent since the slump of October 1998. The rise encompassed all industries. During this period most world stock markets boomed, with particularly sharp rises in some of the emerging markets that had been hard hit in 1998. Share turnover also rose, so that average daily trading in May was at its highest level since January 1994. Nonetheless, the extent of share issues was still low. In the period reviewed the yield on indexed bonds was 3 percent in real terms, while the nominal yield on unindexed bonds and Treasury bills was 5 percent. The changes in the yield to maturity of most bonds were negligible, and the real interest rate on them remained higher than in previous years.
 

Figure 10. Monetary aggregates and credit (change in prev. 12 months)
Figure 11. Nondirected bank credit (NIS million per month)
Figure 12. The sheqel exchange rate against the currency basket


Table 8. Monetary Indicators and Nondirected Bank Credit, 1997-99
(annual terms, percent)


1998
1999
Jan-June
*

1997
1998
II
III
IV
I
II
1998
1999
Rates of change Average
Compared with preceding quarter
During perod
M1a
14.3 12.1 17.2 27.6 13.1 -4.9 11.3 9.7 5.9 5
M2b 25.8 22.6 13.0 26.9 6.9 32.7 24.7 19.1 31.9 5
M3c 25.3 22.1 15.7 21.9 23.6 25.5 20.9 21.2 25.7 5
Nondirected bank credit 18.2 16.0 18.5 15.8 35.1 11.3 13.3 14.5 13.1 5
   Unindexed local-currency 8.6 16.3 21.6 18.4 26.1 20.7 19.0 17.3 19.1 5
   CPI-indexed 19.0 13.9 10.9 15.5 23.9 20.4 8.6 6.7 12.4 5
   Foreign-currency indexed and denominated 32.3 18.3 25.0 12.8 64.3 -8.9 12.2 21.9 6.6 5
*
Last month for which data available.
a
Narrow money supply (cash in the hands of the public and demand deposits).
b
M1 plus short-term local-currency deposits.
c
M2 plus foreign-currency-indexed and denominated deposits.

 
Figure 13. Yield on Treasury bills (end-period figures)

Table 9. Interest Rates, Yields, and the Share-Price Index, 1997-99


1998
1999
Jan-June
*

1997
1998
II
III
IV
I
II
1998
1999
Nominal interest
Nondirected local-currency credit 18.7 16.2 16.4 14.5 16.2 17.6 16.5 17.2 17.1 5
Average monetary loan 14.3 12.0 12.2 10.4 12.1 13.6 12.5 12.8 13.1 6
SROs 12.2 10.2 10.3 8.7 10.5 11.9 10.7 11.1 11.5 5
3-month Eurodollar 5.6 5.4 5.6 5.5 5.1 4.9 4.9 5.5 4.9 6
Yield to maturity on
Treasury bills
14.1 12.3 12.2 10.5 13.0 13.7 12.6 13.0 13.3 5
10-year bonds 4.0 4.8 4.9 4.8 5.0 5.2 5.0 4.8 5.1 6
5-year bonds 3.9 5.0 5.4 4.9 4.9 5.6 5.3 5.2 5.4 6
General share-price index (points) 129.2 137.5 146.4 136.8 135.1 146.8 181.2 139.0 164.0 6
*
Last month for which data available.