Although business activity recovered faster than expected in the third quarter, companies have not started to add staff, according to the Bank of Israel's quarterly companies survey.

The Bank of Israel.
Photo: Ariel Jerozolimski

"Business activity started to recover faster than expected, driven by a modest increase in domestic activity," the central bank reported. "Similar to previous crises the labor market is reacting in delay to signs of an emergence out of the crisis. We do not yet see growth in the number of employees despite the recovery in business activity."

The survey conducted among a representative sample of 635 companies found that much of the positive trend came from growth in manufacturing activity and domestic demand, although signs of a recovery were also reported in the trade and services sectors, albeit at a more modest pace. Manufacturing activity grew moderately despite reports by companies in the previous quarter of expected declines in orders in the third quarter.

"The recovery in business activity was greater at large companies, probably because of a recovery in financing difficulties they reported," said the Bank of Israel.

Business activity in the hotel industry fell in the third quarter compared with the same quarter last year, continuing the sharp decline reported since the beginning of the year. The drop was attributed to a decline in overnight stays both by foreign and local tourists. Hotels said that limited demand by foreign tourists was the main obstacle to growth. Looking ahead to the fourth quarter, hotels expected little change.

Similar to the findings in the second quarter, there was no change in activity in the construction sector in the third quarter.

"However, early optimism is derived from the slight increase in housing starts and positive expectations for growth in activity in the fourth quarter," the central bank said.

Companies' 12-month expectations for inflation rose moderately during the third quarter to 3.2 percent on average, from 2.8% in the previous quarter, exceeding the limit of the Bank of Israel's inflation target of 1%-3%. Forty-seven percent of respondents said they expect inflation to exceed 3%.

The percentage of companies that expect inflation to be within the government's target range dropped to 65%, from 73% in the previous quarter. Companies expect inflation to continue to rise in the fourth quarter, to 4.3% in annual terms.

The respondents expected that the dollar would cost NIS 4 on average by the end of September 2010, from an outlook of NIS 4.2 three months earlier. The respondents forecast an average dollar level of NIS 3.80 by the end of the fourth quarter of this year, compared with a forecast of NIS 4 in the previous quarter. The shekel-dollar exchange rate stood at NIS 3.78 on the day the companies survey was conducted.