The Bank of Israel reduced its economic growth forecast for this year to 4.6 percent from 5% after the month-long war in Lebanon pushed up military costs and forced the closure of factories.
Expansion will slow further to about 4% next year, the central bank said Wednesday. Business gross domestic product, which excludes government and non-profit organizations, will likely grow 5.3%, down from a previous forecast of 6.5%, and 5.1% in 2007, the bank said. The forecast "has been updated in the light of the hostilities in the North'' and "the government's decision to increase public expenditure as a result of the fighting," the central bank said.
The reduction in the Bank of Israel's growth forecast confirmed what its governor, Stanley Fischer, has been saying for weeks: that the fighting in Lebanon would cut economic growth. He said in an August 25 interview with Bloomberg News that GDP growth might slow by as much as 1% because of the conflict. The government's central bureau of statistics cut its estimate of growth this year by 1.1 percentage point to 4.5% on September 19 because of the fighting. Any economic slowdown in the US, its biggest trading partner, may further crimp growth in Israel, it added. The central bank said any additional rise in defense expenditures could boost the budget deficit and trigger tax increases, which would lead to a greater economic slowdown.
"It should be borne in mind that a considerable share of the rise in defense consumption is supplied by imports and thus does not serve to boost aggregate demand in the economy," the bank said. "To the extent that expenditure is used to cover the cost of increased call-up for army reserve duty, it would have a direct adverse effect on the supply of business-sector product."
The bank also lowered its estimate for the growth of investment in fixed assets to 2% from 6.9%, and said growth will pick up to 4.8% in 2007. Consumer spending will probably increase 2.8% on a per capita basis from a previous estimate of 2.4%, it said. That will accelerate to 3.4% in 2007, it estimated.
As economic growth tapers off, unemployment will decline more slowly, the central bank said. It will average 8.9% this year, up from a previous projection of 8.5%, and fall to 8.5% in 2007, it said.
The bank didn't revise its estimates for exports of goods and services, which it expects to increase 6.5%. Imports will grow 4.7%, down from 5.5%, the bank said. (Bloomberg)