Recent Economic Developments, 88

01/11/1999
All Press Releases In Subject:
The Economy and Economic Activity
Recent Economic Developments, 88, April 1999 - September 1999


 Main Developments
  The Principal Industries
   The Labor Market
    The Balance of Payments
     Prices
      The Public Sector
       The Money and Capital Markets



Previous Economic Developments 87


Main Developments

There were several positive economic developments in 1999:II and 1999:III (the period reviewed). However, only once the data for the next few months is in will it be possible to tell whether these trends are established and there really is a turnaround from the low level of economic activity that has prevailed in the last three years. National Accounts data for 1999:II indicate a rise in demand, as do other indicators for 1999:III. Most of the rally in demand stems from the continued expansion of investment, private consumption, and exports. Construction was particularly notable among the principal industries, its longstanding decline being checked in the period reviewed. Despite indications of economic recovery, the unemployment rate rose slightly, although this was expected as this indicator responds with a lag to economic changes. In the period reviewed the Consumer Price Index (CPI) rose, and in view of the decline in prices evident in 1999:I an annual inflation rate of less than 4 percent (the inflation target) is expected. During the period reviewed the NIS/dollar exchange rate fluctuated, and at the end of it was 6 percent higher than at the beginning. The trade deficit continued to widen despite the expansion of exports, as the rapid rise in imports persisted. The deviation from the budget deficit target continued in the period reviewed, but moderated towards its end. In the sphere of monetary policy, the Bank of Israel reduced the interest-rate in April, May, and August.

On the sources side, National Accounts data show a 5.9 percent quarterly increase in GDP (annual terms, seasonally adjusted) in 1999:II. Business-sector domestic product grew by 7.5 percent, and goods and services imports by 23 percent. Total uses, serving as an indication of aggregate demand, rose substantially in 1999:II. As regards 1999:III, the Bank of Israel's Survey of Companies shows that the recovery evident in 1999:II continued in the principal industries excluding construction, and that the proportion of firms reporting demand-side restrictions on expansion declined. The fall in construction persisted, but moderated significantly vis-a-vis the previous quarters.

The unemployment figures, which serve as a lagged indicator of economic activity, show that the unemployment rate (seasonally adjusted) rose from 8.7 percent in 1999:I to 8.8 percent in 1999:II, and also deepened, while the participation rate remained virtually unchanged. Monthly data indicate that the unemployment rate stabilized at 8.7 percent between March and July. The number of unemployed persons reached the peak evident in 1998:II. The contribution to the increase in the unemployment rate in 1999:I came entirely from the public sector, where employment had contracted after rising steeply, while in 1999:II it came primarily from the business sector. The average real wage per employee post rose in the period reviewed (to July) compared with the equivalent period in 1998, as a result of the increase in the real wage in the business sector and its decline in the public sector (before the wage agreement had been put into effect).

Despite the rise in exports, the trade deficit continued to widen in the period reviewed as the rapid expansion of imports persisted. Most of the increase in imports stemmed from imports of capital goods, which were up by 22 percent over the equivalent period in 1998. Import and export prices continued to decline in 1999:II. The terms of trade were seriously affected by an over 20 percent increase in fuel prices, after these had plummeted in 1998. The terms of trade including fuel deteriorated over 1999:I, while excluding fuel they improved. In 1999:II there was hardly any change in exports vis-a-vis 1998:II, while imports continued to rise. In the period reviewed the trend of increased direct investment by nonresidents persisted, and the number of offerings abroad by Israeli firms was notable.

The CPI rose by 4.7 percent (annual terms) in the period reviewed, compared with 8.2 percent in the equivalent period in 1998, after declining in 1999:I, so that the rate of price increases in 1999 is expected to be below the 4 percent inflation target. 12-month inflation expectations, as measured from the capital market, remained fairly stable during the period reviewed. According to the government's decision made at the beginning of August, the inflation target for the years 2000 and 2001 will range between 3 and 4 percent.

During the period reviewed the rate of expansion of public-sector product accelerated, and the deviation from the budget deficit target persisted; towards the end of the period the deviation moderated, however, primarily as a result of the narrower gap between actual and estimated tax receipts. On the income side there is a serious shortfall because the average level of prices and the growth rate of GDP are lower than expected, and because various income items-including intensified tax collection-were overestimated. The fall in expenditure since the beginning of the year is fully explained by the slower rate of price rises than expected and by the deferment of the implementation of wage agreements. According to the State Revenue Administration, total tax receipts (cumulative basis) were up over the equivalent period in 1998. In view of the deviation from the planned deficit target, the government decided in August to adjust the deficit reduction path, deciding that in the year 2000 the deficit should be 2.5 percent of GDP. In both 2001 and 2002 the planned deficit should fall by at least 0.25 percent, and by more if the forecast growth rate warrants this. Be this as it may, in 2003 the deficit should be no more than 1.5 percent of GDP, maintaining the long-term path of the budget deficit. In September the government approved the budget for the year 2000, which amounts to NIS 194.2 billion (excluding debt repayment).

During the period reviewed the Bank of Israel reduced the interest rate three times, in April, May, and August. These reductions were relatively moderate, reflecting the Bank of Israel's cautious monetary policy against the backdrop of the recent world financial crisis, and also the fact that inflation expectations and forecasts for the year were above the target. In the period reviewed the interest-rate spread was also affected by changes in interest rates abroad. In 1999:II the interest rates on both the pound sterling and the euro were lowered by half a percentage point, further to the previous reduction of dollar interest. These reductions contributed to the rise in the spread between domestic and foreign interest rates, and also constituted part of the backdrop enabling the Bank of Israel to lower its interest rate. In 1999:III the downward trend of interest reversed in the US and the UK, as expressed in the half a percentage point increase in interest on both the dollar and the pound sterling. In April the shekel depreciated by 3 percent against the dollar, due apparently to the narrowing of the interest-rate spread and increase in uncertainty as the general elections approached. After the elections, in May, June, and until mid-July, the shekel appreciated, and the exchange rate reverted almost to its pre-depreciation level. From the end of July until the end of August the shekel depreciated by about another 4 percent.

After the general share-price index rose in 1999:II, in the wake of an increase in 1999:I, there was a trend reversal in August, and the index fell in 1999:III. The rise in the indices in the first half of the year and decline in the second half were evident in all areas of commerce. Turnover also rose significantly in March through June, whereas in August and September it fell to the level that had prevailed at the beginning of the year.
 

Figure 1. State-of-the-economy index (average 1994=100)
Figure 2. Industrial production (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
Apr-Septa
*

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

5.0 3.0 -1.9 1.4 0.5 0.4 9.1 1.8 4.6 9
Large-scale retail trade 8.4 6.5 -8.4 6.2 9.7 -3.0 15.5 7.2 3.8 9
Manufacturing production (excl. diamonds) 1.9 2.8 -1.2 2.7 -5.4 0.1 8.9 2.1 -0.2 8
Business-sector consumption
of electricity
4.4 2.5 -25.1 8.4 -2.4 -14.9   7.5 -9.4 6
Index of revenue
in commerce
4.8 2.6 -4.1 1.0 11.9 -2.1 20.6 3.5 3.3 8
Index of total revenue 4.6 3.6 -5.3 11.2 -2.9 7.3 23.0 3.1 4.7 8
Rates of change (percent), compared with preceding quarter
Tourist arrivals -6.5 -4.9 -5.2 3.3 6.5 1.9 11.8 -2.6 13.7 8
Immigrant arrivals -5.4 -15.4 21.7 14.5 -16.9 9.8 46.9 -18.2 38.7 7
Residential starts -9.9 -21.2 14.5 5.7 -23.5 2.7   -36.8 -4.9 6
of which:
 Public sector
-18.0 -44.4 10.0 -20.6 8.4 6.1   -63.6 0.5 6
Residential completions 21.7 -21.6 -10.4 -12.9 -5.0 -9.4   -7.2 -32.8 6
of which:
 Government-initiated
36.4 -22.7 -9.7 -26.2 41.7 -27.2   -16.7 -31.2 6
Survey of companies (net balance, percent)b
Product of manufacturing
firms (not adjusted)
-3c -8 -6 -1 -8 7 18

9
Product of manufacturing
firms (adjusted)
-3c -8 -16 -2c 1c 7 9

9
Sales by commercial
firms (not adjusted)
-12c -13c 13 -28 3 8 25

9
Sales by commercial
firms (adjusted)
-12c -13c -10c -14c 9c 7c 4c

9
*
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

In the period reviewed there were several positive economic developments, particularly in 1999:III, but it is too early to tell whether they indicate that the economic rally is becoming entrenched. National Accounts data for 1999:II point to a rise in demand, and are supported by further indicators for 1999:III.

On the sources side, National Accounts data registered a 5.9 percent quarterly rise in GDP (annual terms, seasonally adjusted) in 1999:II. Business-sector domestic product increased by 7.5 percent, and goods and services imports by 23 percent. Total uses, serving as an indication of aggregate demand, soared in 1999:II. Private consumption (the principal component of uses) rose by a real 5 percent in 1999:II, public-sector product expanded by 11 percent, and gross domestic investment continued to grow in 1999:II, after rising steeply in 1999:I (by 22 percent, apparently due to an increase in inventory), soaring by 30 percent. Goods and services exports continued to rise in 1999:II, increasing by 11 percent (after 10 percent in 1999:I).

Responses from companies participating in the Bank of Israel's quarterly Survey of Companies indicate that the rally in the principal industries with the exception of construction, which began to be evident in 1999:II, persisted in 1999:III, and that fewer companies reported that demand restrictions had prevented them from expanding. Reports from manufacturing firms indicate that in the last two quarters output and exports rose, and many companies reported an increase in export orders. The activities of hotels and transport and communications also continued to rally. Reports from construction companies also point to a continued decline in the extent of construction, although according to several firms the decline is significantly more moderate than in the two preceding quarters.

The indicators in the upper part of Table 1 show that during the period reviewed the trends of changes were varied. After most of them declined in 1999:II, they all rose in 1999:III, some of them ,more rapidly than others. The index of manufacturing production (until August) remained almost unchanged over the equivalent period in 1998. A comparison of quarterly (seasonally adjusted) data shows virtually no change from 1999:I to 1999:II but a 9 percent rise (annual terms) in 1999:III (July and August averages) over 1999:II. Large-scale retail trade, which declined by 3 percent in 1999:II, rose by 16 percent in 1999:III. In commerce, too, activity accelerated in 1999:III (until August). The state-of-the-economy index, which rose by about half a percentage point in 1999:II, increased by 9 percent in 1999:III. Imports of intermediates (Table 4), which shrank in 1999:I to its lowest level for a very long time, once again expanded relatively rapidly throughout the period reviewed.

During the period reviewed (until July)1 the output of the leading manufacturing exporters rose, while that of most of the industries producing for the domestic market generally fell. Among the industries that expanded, there was a marked 5.4 percent growth in the output of the electronic equipment industry, though this did not compensate for the 3.6 percent decline in the preceding quarter. In machinery and equipment there was a 2 percent rise, and transport equipment recorded a quarterly increase of over 1 percent. Growth rates were less than 1 percent in textiles, clothing, leather, wood, furniture, and paper and printing. There was, however a steep 4 percent fall in the output of the jewelry industry (evident for five successive quarters) and in the chemicals, rubber, and plastics industries. The output of the metal and metal products, quarrying, non-metallic minerals, and food, drink and tobacco industries fell by 2 percent.

After a long period of declining activity in the construction industry, this trend appears to have been checked in the period reviewed, as expressed mainly on the demand side. Starting in April and May, the demand indicators show a rally, while according to the supply indicators the level of activity is low. In May and June the number of sales of both new and second-hand apartments rose (up by 30 percent over the equivalent period in 1998), as did private-sector sales. The number of immigrants, which had fallen by 15 percent in 1998, was up by 39 percent in April through July over the equivalent period in 1998; starting in May a steadily increasing number of mortgages were taken up, after their number had fallen in the first few months of the year, inter alia because the purchases brought forward had been offset and the assistance extended had been utilized by the end of 1998. On the supply side, the continued slowdown in activity evident since the beginning of the year was notable, and was expressed in the lower number of building starts and completions. The discrepancy between developments on the demand and supply sides in construction was expressed in the contraction of stocks of unsold apartment and real rise in unit prices.

The index of total revenue for all commerce and services industries (according to seasonally-adjusted VAT data) rose by 5 percent in the period reviewed (until August) compared with the equivalent period in 1998. Activity also increased in tourism; after a steady decline in the number of tourist entries in the two previous years there was a rise in both entries (14 percent over the equivalent period in 1998) and hotel bed-nights (11 percent).

1 Rates of change in this section are calculated on the basis of April-July averages vis-a-vis the 1999:I average.
 

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


1998
1999
Apr-Septa
*

1997
1998
I
IV
I
II
1998
1999
Rates of change (average annual rates, percent, constant prices), compared with preceding quarter
GDP 2.9 2.2 2.9 1.8 -2.0 5.9 2.0 2.1 6
Business-sector product 2.9 2.2 2.3 1.3 -4.3 7.5 1.6 1.6 6
Private consumption 4.2 3.6 -0.5 -3.0 2.9 4.8 2.9 1.0 6
Gross domestic investment -6.8 -8.0 52.2 4.4 21.6 30.3 -15.1 26.0 6
Goods and services exports 7.7 6.3 -11.0 1.4 10.3 10.8 12.5 2.5 6
Goods and services imports 1.9 1.7 2.2 -1.5 27.4 23.3 2.9 12.1 6
Public-sector product
1.9 2.0 0.6 -0.1 1.9 11.1 2.7 3.3 6
*
a
Last month for which data available.
Compared with same period in preceding year.

Contents



The Labor Market

The unemployment rate (seasonally adjusted), which generally serves as a lagged indicator of the level of economic activity, rose to 8.8 percent in 1999:II, from 8.7 percent in 1999:I. Monthly data indicate that the unemployment rate remained stable at 8.7 percent from March to July. The continued slack in the labor market was due primarily to the low level of aggregate demand, while the participation rate remained almost unchanged (53.5 percent in 1999:II compared with 53.6 percent in 1999:I). Thus, the civilian labor force grew by 0.4 percent from 1999:I to 1999:II.

The number of unemployed persons rose by 2.4 percent, from 200,000 in 1999:I to 205,000 in 1999:II, after soaring by 7.8 percent in 1999:I over 1998:IV. The number of unemployed persons thus reached the peak evident in 1998:II. The number of Israelis employed remained virtually unchanged over 1999:I, but an examination of their composition shows that the number of persons employed full-time fell by 2.7 percent, parallel to the 5.2 percent rise in the number of persons employed part-time, who accounted for 26.4 percent of all employed persons in 1999:II. In 1999:I the contribution to the rise in the unemployment rate2 came entirely from the public sector, while in 1999:II it derived from the business sector. According to its industry composition, manufacturing contributed some 0.6 percent to the rise in the unemployment rate, and education, public administration, and banking contributed to a lesser extent. Construction contributed less than in the past (0.1 percent) to the unemployment rate, while the rise in the number of persons employed in commerce and health services over and beyond the increase in the civilian labor force each contributed about 4 percent to the decline in the unemployment rate.

Alongside the rise in the unemployment rate, it is also possible to discern its deepening. The rate of unemployed persons seeking work for six months or more was 29.5 percent in 1999:II, compared with 28.3 percent in 1999:I, and an average of 24.1 percent in 1998.

Since the unemployment rate is an indicator with a lag of the level of economic activity, even if there has recently been a trend shift in the latter, indicating that the economy is on the cusp of a recovery, it will not necessarily be expressed by a decline in the unemployment rate in the coming months.

The average real wage per employee post in April through July rose by 0.9 percent over the equivalent period in 1998. The rise in the average real wage reflects a 2.5 percent increase in the real wage in the business sector and a 1.5 percent decline in the public sector. There were marked wage increases in business services (7 percent) and construction (3.1 percent). In manufacturing, too, the real wage rose notably (3.9 percent), while employment in it contracted. There was a marked decline in the public-services wage in all areas (public administration, education, and health), reflecting the postponement of the implementation of the wage agreements (a 4.8 percent increase in wages).

In 1999:II the unemployment rate among immigrants was 11.4 percent, compared with 9.6 percent in 1999:I and 11.6 percent in 1998:II; immigrants' participation rate was 54.1 percent in 1999:II, slightly below that in 1999:I and in 1998:II. The rise in the unemployment rate of immigrants, alongside the fall in their participation rate, despite the rise in their average period of residence in Israel, also reflected the slack labor market.

In 1999:II the Employment Service significantly increased the number of work-seekers referred to retraining courses (a monthly average of 11,200 referrals, compared with 5,333 in 1999:I), thereby helping to prevent a steeper rise in the unemployment rate. The number of work-seekers who refused to accept the work offered to them fell slightly in the first half of the year from their number in 1998. In July and August there were 5,100 referrals to retraining, monthly average, and the number of refusers continued to decline. The decline from 1999:II appears to be explained mainly by the strike of National Insurance Institute employees.

2 The contribution to the rise in the number of unemployed persons was calculated as the difference between the number of Israelis who would have been employed if employment had expanded at the rate at which the civilian labor force expanded and its actual increase.


 

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
Apr-Septa
*

1997
1998
III
IV
I
II
III
1998
1999
('000s)
Civilian labor force 2,208 2,270 2,276 2,292 2,312 2,321
2.2 3.0 6
Israelis employed 2,041 2,077 2,092 2,106 2,111 2,116
0.3 3.4 6
   Business sectorb
1,445 1,446 1,450 1,454 1,476 1,480
-1.3 2.9 6
   Public sectorb 597 631 642 651 639 635
4.0 3.8 6
Average hours worked
per employee
b

38 37 37 37 37 37
-2.1 -1.6 6
Claims for
unemployment benefit
96 108 111 106 107 110 102 14.8 -4.5 9
Work seekers 143 156 157 152 156 160 154 9.6 -1.1 9
Real wage per employee post (NIS)c 4,389 4,489 4,508 4,441 4,485 4,556 4,523 3.0 1.0 7
   of which: Business sectorc
4,420 4,548 4,579 4,483 4,585 4,684 4,672 3.9 2.2 7
Unemployment rate (%) 7.5 8.5 8.1 8.1 8.7 8.8


6
*
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 the period reviewed the trade deficit continued to widen, despite the rise in exports, and was mainly the result of the persistently rapid increase in imports. The main component contributing to the rise in imports was imports of capital goods, which were about 22 percent higher in the period reviewed (in dollar terms) than in the equivalent period in 1998. In 1999:II prices of imports and exports continued falling. The terms of trade were greatly affected by the rise of over 20 percent in fuel prices, following the significant reduction in the latter in 1998. The terms of trade including fuel deteriorated by 0.6 percent compared with the first quarter of the year, whereas if fuel is excluded, the terms of trade improved by 1.1 percent. In 1999:II there was no real quantitative change in goods exports compared with 1998:II (a rise of 0.2 percent). The rise in imports persisted, and even accelerated: in 1999:II imports were 8.6 percent greater than in 1998:II.

The increase in the deficit is apparently related to the considerable rise in domestic demand in spheres where Israel has no domestic production, such as commercial passenger aircraft, unworked diamonds, overland transport vehicles, and machinery and equipment in several industries. The continued deceleration in world trade, which was reflected in the slower growth of exports (excluding diamonds), also contributed to the increase in the deficit. The fall in (dollar) import prices resulting from the slower rise in world trade may have played a part in the acceleration in imports.

The trends in industrial exports (in dollar terms) were similar to those of total exports-a 3 percent rise in the period reviewed compared with the same period in 1998. There were marked differences in the developments in different industries: mining and quarrying, and non-metallic minerals contracted by 20 percent, electrical equipment and motors by 11 percent, and basic metal products by 12 percent; in contrast, transport vehicles expanded by 16 percent, rubber and plastic by 19 percent, and communication and control equipment by 8 percent.

Most of the increase in goods imports reflects the sharp rise in the import of capital goods in the period reviewed compared with the equivalent period in 1998. Capital goods serve as an indication of future activity. Imports of raw materials and consumer goods rose more moderately. An analysis of capital goods imports in 1999:I shows that the increases in manufacturing industries (mainly in electronics), in services (mainly R&D and software), and in transport and communications were the most prominent.

Nonresidents continued making direct invest-ments-which are subject to long-term consid-eration-and these amounted to $ 1.5 billion in the period reviewed. Nonresidents' net investments in Israeli securities totaled $ 0.5 billion. The extent of new issues offered abroad by Israel companies was notable, reaching more than $ 0.6 billion; this followed a slowdown in 1998 which ensued from the global financial crisis which began at the end of 1997.

Although interest-rate differentials in the period reviewed were greater than in the comparable period in 1998, residents' capital inflow in the non-financial private sector was below that in the equivalent period in 1998, apparently due to internalization of the risk incurred in taking foreign-currency credit.


 

Figure 8. Foreign trade ($million per month)
 

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


1998
1999
Apr-Septa
*

1997
1998
III
IV
I
II
III
1998
1999
Monthly averages
Trade deficit 467 362 391 367 407 388 479 360 433 9
Goods imports 1,776 1,768 1,752 1,766 1,766 1,824 1,922 1,768 1,873 9
   Consumer goods 323 323 331 314 332 317 348 325 333 9
   Capital goods 380 378 365 409 411 433 479 375 456 9
   Intermediates 1,073 1,068 1,056 1,044 1,023 1,074 1,094 1,068 1,084 9
Goods exports 1,310 1,406 1,362 1,400 1,359 1,436 1,444 1,407 1,440 9
   Manufacturing 1,241 1,337 1,288 1,336 1,297 1,366 1,370 1,334 1,368 9
Quarterly averages
Net current account -850 -167 -1,023 1,138 -770 -502
-89   6
Long- and medium-term
capital flows
1,362 878 322 449 1,197 1,100
669   6
   of which: Private sector 1,057 594 533 282 1,218 774
761   6
Net short-term capital flowsb 988 -504 136 -520 -331 -144
-805   6
   of which: Private sectorb 1,000 -498 190 -563 -294 -295
-825   6
Net foreign debt (% of GNP) 14.62 12.46 14.06 12.46 12.46 11.97
20.43   6
End-period Bank of Israel reserves 20,332 22,674 21,715 22,674 21,983 21,931 21,854 21,715 21,854 9
*
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
 

Prices

The CPI rose by 4.7 percent in the period reviewed, compared with a rise of 8.1 percent in the same quarters in 1998; in 1999:I it had fallen (all data in this section are in annual terms). Current assessments are that price rises in 1999 will be below 4 percent. In the last twelve months the CPI rose by 5.3 percent, the main rise having occurred in October and November 1998, when the index surged by 4.3 percent, essentially as a reaction (mainly by the exchange rate) to the crises in international capital markets.

In 1999:II the CPI rose by 4.3 percent, and in 1999:III by 5.1 percent. Following the price reductions in the first quarter of 1999 (which reflected an offset to the exceptional price hikes at the end of 1998), the trend changed at the beginning of 1999:II; this is consistent with the seasonal pattern whereby prices rise relatively steeply in that quarter, due to lively demand related to the various holidays which fall in that period.

The rise in the CPI in the period reviewed was mainly due to the housing component. According to its latest definition, this item is closely related to the rise in the NIS/dollar exchange rate, as most rental agreements quote the rent in dollars. Nevertheless, in the period reviewed housing rose by more than the depreciation3 of the NIS against the dollar: the relevant rate of depreciation in this period was 12 percent, while the housing component rose by 15.7 percent in annual terms. In other words, housing reflected a price rise in dollar terms, possibly indicating a recovery in the housing industry. It is also noteworthy that the CPI excluding housing rose by only 1.9 percent in the period reviewed, when the overall index rose by 4.7 percent.

Other categories which showed marked changes were clothing and footwear, and education, culture and entertainment. Clothing and footwear went down by 12.3 percent in the period reviewed, having risen by 17 percent in the same period in 1998; education, culture and entertainment rose by 7.4 percent, similar to its rise of 8.7 percent in the same period in 1998. This high increase is mainly due to seasonal volatility associated with the summer months. Despite its relatively high increase, this item rose by less than expected in every month in the period reviewed.

Twelve-month inflation expectations as derived from the capital market remained fairly stable during the period reviewed, and declined thereafter. Using monthly averages, a downward trend is evident till June, when inflation expectations were 5.5 percent in June, followed by a rise, up to 6.4 percent in September, falling again in October. At the beginning of August, the government set the inflation target for the years 2000 and 2001 at between 3 percent and 4 percent.

3 Calculated on the basis of two-monthly moving average exchange rates.
 


 
Table 5. Selected Price Indicies, 1997-99
(annual rates of change during period, percent)


1998
1999
Apr-Sept
*

1997
1998
III
IV
I
II
III
1998
1999
CPI 7.0 8.6 7.4 18.8 -5.5 4.3 5.1 8.1 4.7 9
CPI excl. housing, fruit and vegetables 6.7 8.5 2.2 23.8 -1.4 2.7 1.1 6.0 1.9 9
CPI excl. housing, fruit and vegetables, controlled goods, clothing and footwear 7.8 8.8 6.1 22.6 2.9 2.2 3.7 5.3 2.9 9
Index of housing prices 7.5 8.8 13.1 13.4 -17.9 8.3 23.5 8.4 15.7 9
Wholesale price index 5.9 8.2 0.6 31.7 -3.4 4.1 7.3 2.3 5.6 9
NIS/$ exchange rate 7.9 18.2 21.2 39.2 -13.2 5.9 16.3 14.9 11.0 9
NIS/currency-busket rate
3.7 20.6 28.7 45.8 -20.2 0.6 21.5 18.4 10.6 9
*
Last month for which data are available.

Contents



The Public Sector

In the period reviewed, public consumption was 2.4 percent higher than in the previous six months (at fixed prices, and seasonally adjusted). In 1999:II, the number of persons employed in the public services fell by 0.6 percent from the number in 1999:I (CBS data, seasonally adjusted); this followed a reduction of 1.9 percent in the previous quarter, and a significant increase in 1998.

In the period reviewed, the deviation of the budget as implemented from the target deficit persisted, but the deviation/ moderated towards the end of the period, owing mainly to the narrowing of the gap between actual tax collections and the estimates prepared at the beginning of the year.

The total deficit since the beginning of the year amounted to NIS 10.6 billion. About NIS 5.1 billion of this was financed by loans from the public and capital income (from privatization), and the rest, via injection (including a reduction of the government's bank balances).

The Accountant-General's estimate, mainly on a cash basis, gives the government's domestic deficit as NIS 7.6 billion since the beginning of the year, compared with the budget estimate for the whole year of NIS 10.4 billion. A comparison of the development of the deficit with the seasonal pattern of the deficit in previous years indicates that the cumulative deficit in 1999 is NIS 2.6 billion in excess of the annual target deficit. If the allocation of the retroactive wage increments agreed by the government and the General Federation of Labour is added, the cumulative deficit so far totals NIS 3.4 billion. Only about NIS 0.5 billion of this can be explained by the greater deceleration of activity than that forecast in the budget, assuming a 2 percent volume increase in GDP in the period reviewed.

Total income since the beginning of the year was significantly (5.2 percent) below expectations based on the seasonal pattern. This was due inter alia to the fact that the average level of prices and the rate of GDP growth were lower than forecast, and to an overestimate of the various categories of income, including the non-fulfillment of the forecast intensification of tax-collection. In August and September, however, income rose, and its deviation from the forecast amount, based on the seasonal pattern, contracted. The lag in expenses since the beginning of the year was between NIS 2.8 billion and NIS 3.2 billion, and was due entirely to the lower than expected rate of price increases, and to the delay in implementing wage agreements.

The government's total tax revenues (on a cumulative basis), according to the State Revenue Administration, rose by 2.7 percent in real terms in the period reviewed, compared to the equivalent period in 1998. Taxes on imports including VAT rose by 16 percent (at current prices), and the sharp increases in imports in August strengthened the upward trend. Collection of domestic indirect taxes went up by 5 percent, and direct taxes declined by 0.9 percent. Despite signs of improvement in tax collection at the end of the period, total collection during the period was still below the original estimates of the State Revenue Administration. The rate of increase of transfer payments to households slowed a little in the period reviewed (till July), but was 4.7 percent higher than in the equivalent period in 1998. Total transfer payments have risen by 3.3 percent since the beginning of the year, compared to a rise of 11.7 percent in the same period last year.

In the light of the deviation from the planned budget deficit, in August the government decided to alter the downward path of the deficit, and determined that the deficit would be 2.5 percent of GDP in the year 2000, instead of the original target of 1.75 percent. In each of the years 2000 and 2001, the planned deficit is to be reduced by at least 0.25 percent of GDP, or by more if the growth rate permits. In any event, the deficit in 2003 is not to exceed 1.5 percent of GDP, so that the downward path of the government deficit will be adhered to over time, albeit at higher levels of deficit than specified in the law before the change.

In its meeting on September 7, 1999, the government passed the proposed budget for the year 2000, totaling NIS 194.2 billion (excluding debt repayments). It was decided to increase expenditure on infrastructure construction by NIS 300 million compared with that in the 1999 budget. This rise in expenditure will be financed by raising the National Insurance ceiling (only that applicable to workers) and the Health Tax from four to five times the average wage, a step expected to yield additional income of NIS 450 million. A tax is to be imposed on diesel for vehicles, which it is estimated will bring in income of NIS 570 million. The balance is expected to obtained from tax revenues as a result of changes in the basis of the estimate (forecast collection for 1999), without taking into account income of NIS 680 million next year which appears in the budget under the item "Intensification of tax collection."
 

Figure 9. Government cash flows (NIS million, monthly average)
 
Table 6. The Budget and its Financing, 1997-99
(cash flows, as percent of GDP)


1998
1999
Apr-Sept
*

1997
1998
III
IV
I
II
III
1998
1999
1. Government domestic expenditure 39.0 38.8 36.7 42.4 39.0 36.8 36.9 36.4 36.8 9
2. Government receipts 36.1 35.5 34.8 34.5 37.3 33.0 34.7 34.6 33.9 9
3. Domestic budget deficit (1)-(2) -2.9 -3.2 -1.8 -7.8 -1.6 -3.8 -2.1 -1.7 -3.0 9
4. Public sector domestic deficita
(5)+(6)
3.2 3.6 2.6 8.1 2.3 3.2 1.7 2.4 2.4 9
5. Government net borrowing from the public 2.2 2.7 2.5 5.4 0.5 2.7 2.8 2.0 2.7 9
6. Public-sector injection (9)-(8)-(7) 1.0 0.9 0.1 2.7 1.8 0.5 -1.1 0.3 -0.3 9
7. Bank of Israel injection
-6.6 -1.1 2.6 -4.0 1.7 -2.3 0.4 1.3 -0.9 9
8. Private-sector foreign-currency conversions 6.6 0.3 -0.2 -0.1 -0.4 0.1 -0.1 -0.2 -0.0 9
9. Change in monetary base
1.1 0.1 2.4 -1.4 3.2 -1.7 -0.8 1.5 -1.3 9
* 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 course of the period reviewed, the Bank of Israel cut the rate of interest three times, from 13 percent in March, down to 11.5 percent in August, where it remained until November.

As a result of the reduction in the interest rate in the first months of the period reviewed, the trend of a narrowing differential between local-currency interest and foreign-currency interest, which had started in February, continued. The difference between the three-month local-currency lending rate and the interest on foreign-currency loans declined during the period reviewed from 8.9 percentage points to 8 percentage points. The differential has shrunk by about 2 percentage points from the beginning of the year till August, after rising steeply towards the end of 1998. The fact that the interest rate was reduced gradually reflects the cautious nature of the monetary policy, against the background of financial crises throughout the world, and also takes account of the fact that inflation expectations for twelve moths and longer, and inflation forecasts of several forecasters were still significantly higher than the target inflation figure.

Changes in interest rates abroad also affected the interest-rate differentials in the period reviewed. In the second quarter, interest on the pound sterling and on the euro was reduced, that on the dollar having been cut previously. These reductions contributed to the widening of the interest differentials between the NIS and foreign currency, constituting another background factor in the reduction of local-currency interest by the Bank of Israel. In 1999:III the downward trend of interest in the US and Britain halted, and there was a rise of a half a percentage point in the rates on the dollar and sterling.

In April, the NIS depreciated by about 3 percent against the dollar. From the General Election in Israel (in May) until the middle of July, the foreign exchange market was calm, and the exchange rate reverted almost to its pre-depreciation level. From the end of July till the end of August the NIS depreciated by about 4 percent.

Inflation expectations, as derived from the capital market, were about 5.3 percent at the beginning of the period reviewed. After three negative indices indicating price reductions in 1999:I, and two more below the forecasts in 1999:II, inflation expectations in July went down to 5.1 percent. The rise to 6.4 percent in inflation expectations in September in the wake of the depreciations in April and August show the rapid transmission from the exchange rate to inflation expectations.

The M1 and M2 monetary aggregates increased by about 20 percent (annual terms) in the period reviewed; M1 rose by 12.2 percent in the last twelve months. The money supply grew by 15.1 percent in the period reviewed, slower than in the comparable period in 1998, and in the last twelve months has increased by 13.9 percent. Among the other monetary aggregates, local-currency deposits, particularly short-term ones, rose more steeply. Treasury bills rose moderately, by about 12 percent, compared with a rise of 38 percent in the same period last year. The public's continued confidence in the disinflation process is evident from the reduction of CPI-indexed long-term deposits, which fell by about 12 percent, and a 50 percent increase in long-term deposits at nominal rates of interest. Deposits in or indexed to foreign currency rose more slowly than did local-currency deposits. Nondirected CPI-indexed local-currency credit rose by about 17 percent, unindexed credit by about 8 percent, and foreign-currency credit by 14 percent (in dollar terms).

After a rise of 20.4 percent in the General Share-Price Index in 1999:II, which followed a 15.7 percent increase in 1999:I, the trend reversed in August, and the index fell by 2.8 percent in the third quarter. The rise in the first half of the year and the drop in prices in the last few months were evident in all the principal industries. Trade turnover also rose in March-June, falling again in August-September to its level at the beginning of the year. New issues to the public and privatization remained low. CPI-indexed bonds gave a real 3 percent yield in the period reviewed, those indexed to foreign-currency yielded 5 percent, and unindexed bonds and Treasury bills, about 7.5 percent.
 

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


1998
1999
Apr-Sept
*

1997
1998
III
IV
I
II
III
1998
1999
Rates of change Average
Compared with preceding quarter
During perod
M1a
14.3 12.1 27.6 13.1 -4.9 11.1 34.9 23.4 20.0 8
M2b 25.8 22.6 26.9 6.9 32.7 22.5 18.5 22.8 19.9 8
M3c 25.3 22.1 21.9 23.6 25.5 19.6 18.9 21.0 21.1 8
Nondirected bank credit 18.2 16.0 15.8 35.1 11.3 12.7 14.5 17.2 16.7 8
   Unindexed local-currency 8.6 16.3 18.4 26.1 20.7 13.8 6.9 22.7 10.8 8
   CPI-indexed 19.0 13.9 15.5 23.9 20.4 12.1 17.4 12.1 16.4 8
   Foreign-currency indexed and denominated 32.3 18.3 12.8 64.3 -8.9 12.0 21.2 17.3 25.1 8
*
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.

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

Table 8. Interest Rates, Yields, and the Share-Price Index, 1997-99


1998
1999
Apr-Sept
*

1997
1998
III
IV
I
II
III
1998
1999
Nominal interest
Nondirected local-currency credit 18.7 16.2 14.5 16.2 17.6 16.5 16.0 15.8 16.3 8
Average monetary loan 14.3 12.0 10.4 12.1 13.6 12.5 12.0 11.3 12.2 9
SROs 12.2 10.2 8.7 10.5 11.9 10.7 10.3 9.8 10.5 8
3-month Eurodollar 5.6 5.4 5.5 5.1 4.9 4.9 5.3 5.5 5.1 9
Yield to maturity on
Treasury bills
14.1 12.3 10.5 13.0 13.7 12.5 12.0 11.4 12.2 9
10-year bonds 4.0 4.8 4.8 5.0 5.2 5.0 5.2 4.9 5.1 9
5-year bonds 3.9 5.0 4.9 4.6 5.6 5.3 5.4 5.2 5.4 9
General share-price index (points) 129.2 137.5 136.8 135.1 146.8 181.2 187.7 141.6 184.4 9
*
Last month for which data available.