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(photo credit: Ariel Jerozolimski)
The financial situation is beginning to stabilize, both here and across the globe, but the real economy will continue to deteriorate and unemployment will continue to rise over the next few months, Bank of Israel Governor Prof. Stanley Fischer said Sunday.
"The financial markets are starting to stabilize abroad and in Israel, partly as a result of monetary policy-making and the unprecedented interventionist policies implemented by central banks and finance ministries around the world, and in particular in the US and Europe. This is the good news," Fischer said at the central bank's presentation of its Annual Report 2008 in Jerusalem on Sunday.
"However, the situation in the real economy will deteriorate and as a result we will see an increase in the rate of unemployment over the next couple of months. This is not unusual. The financial situation recovers before the situation in the real economy."
Earlier on Sunday when presenting the report to President Shimon Peres, Fischer said the economy had coped relatively well with the crisis but that it hadn't reached bottom yet.
The Bank of Israel expects unemployment to reach 7.7 percent this year and 8.3% next year, from a quarterly average rate of 6.1% in 2008. On Sunday, the Israel Manufacturers Association said that since the deepening of the economic crisis from September 2008 to January 2009, 8,000 workers were laid off across industrial sectors, including 5,000 in January only. In a post-Pessah wave of firings, the association expects another 10,000 workers to lose their jobs over the next few months.
The central bank cut its 2010 growth forecast for the local export-oriented economy from 2.3% at the beginning of the year to 1% as world trade growth forecasts were revised significantly downward in recent months. This year, gross domestic product is expected to contract by 1.5% and business sector product by 2.7%.
"Unemployment will start to come down only when growth figures are higher," said Karnit Flug, head of research at the Bank of Israel.
Fischer emphasized that although the country's banks were continuing to be stable, the demand by Supervisor of Banks Rony Hizkiyahu for them to attain capital adequacy ratios of 12% by the end of 2009 must remain intact in view of a deteriorating economic climate.
"It is possible that one or two relatively large companies will collapse and go bankrupt and we have to be ready for such a scenario," Fischer said. "It is clear that the banks are strong enough to cope with the collapse of one or two of these companies."
He cautioned about plans by Prime Minister Binyamin Netanyahu, who is also economic strategy minister, to cut taxes, in light of a widening budget deficit and falling tax revenues.
"This year the economy is already expected to contract by 1.5%; the deficit will widen to 5.9% of GDP, which means that the country's debt-to-GDP ratio, which narrowed to 78% over recent years, is going to rise to 90%," Fischer said. "However, we need to persuade investors and market players that we are working to bring down the country's debt-to-GDP ratio. It is in this context that we need to carefully analyze tax levels in particular as state revenues from tax collection have been dropping rapidly since the start of the crisis."
Fischer added that the 78% debt-to-GDP ratio was still high compared with the average of around 60% in members of the Organization of Economic Cooperation and Development. A reduction of the country's debt-to-GDP ratio reduces the state's interest rate payments and makes it easier to raise capital.
Fischer urged lawmakers to approve the long awaited Bank of Israel Law so the bank could pursue policy-making similar to other global central banks and remain independent. With regard to monetary policy, the governor is currently the sole decision-maker, while the proposed legislation would create a monetary board of governors as is common in the US and Europe.