Israel's economic growth is so far following the textbook
scenario expected by Finance Minister Netanyahu as it showed
growth of 2.6 percent in the fourth quarter of 2003. For the
entire calendar year of 2003 the Israeli economy grew by 1.3
percent, after shrinking in 2002 and 2001 by about one
percent each year. Even per capita GDP rose by about 0.5
percent in 2003, after declining by about 3 percent in each
of the past two years. It is just regrettable that it had to
be done on the backs of the weaker sectors of the Israeli
economy.
The GDP of Israel is now at NIS 466.214 billion which, at
current exchange rates, is about $104.7 billion. Wal-Mart,
the largest company in the US, had revenues (that is,total
sales) of over $240 billion last year. General Electric had
revenues of about $134 billion.
After those two bad years, Israel has still not reached the
level it enjoyed during the first three quarters of 2000,
prior to the intifadah and the global economic slump.
In the third quarter of 2003, growth was 2.8 percent but it
fell by 1.4 percent in the second quarter. The rise in GDP in
the second half of 2003 mainly reflects an increase in
private consumption and in export. Private consumption rose
by an annualized 7.3 percent. Private consumption per capita
rose by 5.3 percent (since there was a two percent population
increase), after falling in the preceding 12-month period.
Export has been good news for a long time and it rose by an
annualized 9.3 percent in the second half of 2003, after
rising by 5.1 percent in the first half and by 3.6 percent in
the second half of 2002.
According to the Central Bureau of Statistics (CBS) Gross
Domestic Product (GDP) rose by 1.3 percent in 2003 and not by
1.2 percent as it reported in preliminary estimates about six
weeks ago. These figures may be adjusted again. Business
production rose in the second half of 2003 by 1.9 percent.
Per capita spending on durable goods rose sharply by an
annualized 28.8 percent in the second half of 2003, following
a downturn of 2.2 percent in the preceding half-year. A 23
percent upturn was also recorded in purchases of household
appliances (refrigerators, washing machines, air conditioners
etc.). Per capita spending on furniture rose by 5.4
percent.
The Finance Ministry projects a growth rate of 2.5 percent
for 2004. Though a big improvement, it would still be only
about half of the potential growth in GDP as estimated by
economists.
Money supply (M1) of the Israeli economy, including cash and
current deposits, rose 3.8 percent in January to a record NIS
34.2 billion, the Bank of Israel reported on Monday. Despite
the seventh consecutive rise in M1, capital market 12-month
inflation expectations are modest at an average of 1.5
percent.
According to the BOI, M1 rose 7.7 percent in 2003. Economists
attribute the steady rise in M1 to the sharp cut in interest
rates which dropped a total of 4.6 percentage points since
December of 2002.
Money supply and inflation expectations are key indicators
that Bank of Israel Governor David Klein uses when
formulating monetary, together with actual prices. The
consumer price index (CPI) fell 0.2 percent in January,
according to recent CBS data.
Klein is expected to continue cutting the bank's key lending
rate next week by 0.3 percentage points to 4.2 percent for
March. The consensus expectation is that he will not lower it
below 4 percent. So with projections of positive CPIs in the
spring and summer, economists expect the upcoming interest
reduction to be among the last. Real interest dropped to 4.1
percent, compared to 5.4 percent in August and as high as 7.4
percent in May 2003.
According to Bank Hapoalim's forecasts, February CPI is
expected to rise by 0.1 percent, though March's index may
drop by 0.2 percent. Other economists expect a slow but more
steady rise in prices.
Interest rates may rise slightly towards the end of the year,
due to accelerated growth, market demands, and higher
interest rates in the US -- if these materialize.
Tax cuts announced last week by Finance Minister Binyamin
Netanyahu have lowered inflation forecasts to 0.9 percent
which is under the official target.
Since the beginning of 2003, the interest rate gap between
shekels and dollars has dropped from 7.85 percent to 3.5
percent. Interest rates in the US are now at 1 percent, while
in Israel they are at 4.5 percent.
Israel's central bank notes that interest here is lower than
in many developed countries, such as Australia (5.3 percent)
and New Zealand (5 percent), and it is only 0.7 percent
higher than in the UK.
