Bank of Israel lowers growth forecast for 2011 to 3.8%

Exports, private consumption are expected to slow down.

By SHARON WROBEL
September 28, 2010 21:27
3 minute read.
Bank of Israel lowers growth forecast for 2011 to 3.8%

bank of israel 248.88. (photo credit: Ariel Jerozolimski)

 
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The Bank of Israel on Tuesday lowered its growth forecast for 2011 to 3.8 percent from 4% previously, on expectations of a slowdown in exports and private consumption.

“Gross Domestic Product is expected to grow by 3.8% in 2011, slightly lower than in the previous forecast of 4% in April,” the central bank said, in an update on the macroeconomic forecasts for 2010 and 2011. “The rapid economic growth in 2010 and the low unemployment rate in the second quarter (6.2%) point to the continued narrowing of the “output gap” that had opened during the global crisis.”

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The Bank of Israel said that the macroeconomic forecasts for 2010 and 2011 have been updated in view of Israel’s second-quarter economic data and the adjustment of growth and trade forecasts abroad.

“Another reason for the downward adjustment of the 2011 growth forecast is the expected slowing of export growth to 5.8%, slightly under the projected growth rate of global trade of 7%,” stated the central bank. “The downward adjustment of the growth outlook in the United States, to which Israeli exports are particularly exposed, will contribute to this. The rate of increase in private consumption is also expected to decelerate, as the level of private consumption is very high today relative to GDP, also due to the adjustment of the inventory of durable goods.”

Growth in the second quarter of this year accelerated to 4.7% on rapid gains in household consumption and exports. Exports, excluding diamonds, are forecast to grow by 11.3% this year before slowing down to a growth rate of 5.8% in 2011, following a contraction of 10.2% in 2009.

Private consumption is expected to grow at a fast rate of 5.2% this year before narrowing to 3.6% next year. Last year, private consumption grew at a rate of 1.7%. The rate of increase in imports, excluding defense and diamonds, is expected to accelerate at a pace of 13.1% this year and slow down to a rate of 9.1% in 2011, recovering from a drop of 12.3% in 2009.

For this year however, the Bank of Israel raised its growth outlook to 4%, slightly higher than the 3.7% rate in the previous forecast, on the back of strong economic data coupled with the low unemployment rate in the second quarter of the year.



“The balance-of-payments data for the first half of 2010 brought on an upward adjustment of the currentaccount surplus,” stated the central bank. “The average unemployment rate is expected to drop to 6.3%, following the steep decrease in the unemployment rate in the second quarter, and the current-account surplus is expected to amount to $6.8 billion.”

In July the rate of unemployment fell to a two-year low of 6.2%, according to figures published last week by the Central Bureau of Statistics.

The Bank of Israel expects the rate of unemployment to drop to 6.3% this year and 6% next year, a steady drop from 7.6% in 2009.

“We are becoming more confident about the durability of Israeli growth given higher-than-expected real GDP growth in the second quarter, and its composition,” said Daniel Hewitt, analyst at Barclays Capital, in a report published before the central bank’s growth update.

“We do not expect this swift pace to be maintained, though we are raising our 2010 growth forecast to 3.7% from 3.3% and our 2011 forecast to 4.0% from 3.5%.


Previously, Barclays Capital had been concerned about the growth deceleration suggested by a slowdown in the first quarter in the pace of growth of exports and consumption that seemed to be confirmed by a slowing in chain store trade, the Purchase Managers Index, and other indicators in the second quarter.

“At the same time, however, other indicators have improved, including industrial production, hi-tech exports, housing, consumer and business confidence,” said Hewitt. “The second quarter gains in GDP seem to settle the question of which set of indicators carried most weight.”

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