(photo credit: Ariel Jerozolimski)
The Bank of Israel on Tuesday raised its forecast for economic growth for this year and next year, citing an expected improvement in global economies and the end of the decline in local economic activity in the second quarter.
Economic growth is expected to be flat this year, which is more optimistic than the previous forecast in April of a contraction of 1.5 percent, the central bank said in a report. It expects the economy to grow at a rate of 2.5% next year, up from its previous forecast of 1%.
Business-sector production is forecast to contract by 0.8% this year, compared with a contraction of 2.7% in the April forecast, and to expand in 2010 at a rate of 2.8%, instead of 1.5%.
"The macroeconomic forecasts for 2009 and 2010 have been revised upward as a result of positive information regarding economic activity in the second quarter of 2009, both globally and in Israel, and in the light of improved forecasts of global growth and world trade," the Bank of Israel said. "Based on national accounts figures for the first half of 2009 and on economic indicators of the last few months, it appears that the decline in economic activity that had been expected to end only at the end of 2009 had effectively ended in the second quarter."
Bank of Israel Governor Stanley Fischer presented the bank's updated growth forecasts to the economic delegation of the Organization of Economic Cooperation and Development (OECD), which arrived Tuesday to gather information for a report on the Israeli economy to be discussed by the OECD's Economic Committee in Paris this November. Fischer stressed the importance of Israel's joining the OECD, which it hopes will take place in 2010.
During the three-day visit, the delegation will meet with the finance minister and senior ministry officials, the education minister, the welfare and social services minister, the Knesset Finance Committee, the director-general of the Prime Minister's Office, the head of the National Economic Council, the Histadrut Labor Federation chairman and the president of the Manufacturers Association of Israel.
"The annual forecast implies a quarterly path of moderate growth of about 2.5% per quarter annual rate during the rest of 2009 and a slow increase in unemployment in the second half of the year," the central bank said in its report. "In 2010, growth will be led by exports, which are expected to increase by 6.3% (excluding diamonds), with a lower increase, 2.7%, in domestic uses, mainly due to slow recovery of investment in the principal industries, whose share in GDP is expected to remain low."
In July, the Bank of Israel's index of economic indicators rose at a preliminary 1.2%, its third consecutive gain following declines since last June. The most recent Central Bureau of Statistics figures showed that gross domestic product rose by 1% in annual terms in the second quarter of 2009 after contracting by 3.2% in the first quarter of the year.
"GDP increased in the second quarter of 2009 at an annual rate of 1%, with increases in exports and private consumption," the report said.
For this year, the Bank of Israel expects a large surplus in the current account of about $7 billion, which it attributes to considerable improvement in the terms of trade and the steep decline in imports.
However, the large surplus in the current account is expected to contract somewhat in 2010, due partly to a deterioration in the terms of trade and partly to a higher increase in imports, 6.9%, representing a correction for the heavy drop in the weight of imports in total sources in 2009, the bank said.
"Unemployment continued to rise in the second quarter [of 2009], however, and reached 8%, with a further decline in the number of employees," the report said. "This is in line with the known lag that generally characterizes labor-market developments."
The central bank expects the average rate of unemployment in 2009 to increase to 8.1%. Unemployment is expected to increase slightly to 8.3% in 2010.
The central bank's update on its growth forecast comes after chief economists of the country's largest banks revised their growth forecasts for the economy over the last two weeks. Bank Hapoalim revised its growth forecast for the economy upward to a contraction of 0.3% for this year, from a contraction of 1.2%, and 3% in 2010, from 1.5%. Bank Leumi raised its 2009 growth forecast to 0%, from a contraction of 0.7%, and predicted 2% growth for 2010.
Meanwhile, Finance Minister Yuval Steinitz on Monday said despite positive indicators, the ministry was not rushing to update its growth forecast for the economy. The Treasury expects the economy to grow at a negative growth rate of 1% in 2009 and return to positive growth of 1.5% in 2010, he said.