Bank of Israel Governor Stanley Fischer said the economy will continue to grow rapidly after only a slight interruption caused by the recent war with Hizbullah.
The economy will grow 4.6 percent this year and 4% annually in 2007 and beyond, Fischer said.
"As long as the world keeps growing and as long as the US keeps growing, I'm pretty sure we'll hit our growth target next year of 4% or slightly more and continue this remarkable period of growth and stability," Fischer, a former deputy managing director of the International Monetary Fund, said in a speech Thursday evening at the Yale Club in New York.
Fischer said the economy had been on track to grow 6% this year before the month-long war with Hizbullah began on July 12. Growth was broad based, with exports, domestic demand and investment all surging, he said.
"We were in as good a condition as you can imagine the economy to be before war broke out," said Fischer.
The economy grew an annualized 5.9% in the first half of the year, driven by exports and foreign investment, Central Bureau of Statistics said on August 16.
Gross domestic product grew a preliminary 5.2% last year, its biggest gain since 2000, as exports rose and the government cut taxes.
The hostilities in Lebanon, which ended with a cease fire on August 14, reduced economic growth by 0.8 percentage point this year, said Fischer. Most of the reduction was due to a slowdown in the northern part of the country, which Fischer said accounted for about 15% of the economy.
The conflict caused businesses such as Iscar Metalworking Co., a toolmaker bought by US investor Warren Buffett before the war, to close or operate on reduced hours.
Fischer said foreign investment remained strong and was not deterred by the war. "This speaks to the confidence of foreign investors in Israeli policy," he said.
The war left 159 Israelis dead and cost the economy as much as NIS 14.5 billion, the Finance Ministry estimates.
The war "will have fiscal consequences," said Fischer, much of it due to the cost of replenishing the military's supplies, which will be spread over three years, with most spending coming this year.
Despite the costs of the war, the government will hold spending growth to 1.7% a year, while the economy grows about 4% or more annually, Fischer said.
"That means the government share of gross domestic product will be going down," he said. "We'll keep the budget under control and we'll keep monetary policy under control."
Annual inflation slid to 2.4% in July, the lowest since December, and remains within the central bank's 1% to 3% target.
The Bank of Israel kept its benchmark interest rate unchanged on August 28 after raising it last month by a quarter-point because of concern that fighting in Lebanon would hurt the shekel and accelerate inflation. The bank maintained the rate it charges commercial lenders to borrowing money at 5.5% for September.
The Lebanon war will probably have no effect on the country's inflation rate, which had been falling before hostilities broke out, minutes of the Bank of Israel's latest interest rate deliberations showed. The shekel has gained about 3.5% against the dollar since July 14, when it briefly weakened with the outbreak of fighting.
Fischer said Israel's open economy and entrepreneurial spirit, and the government's commitment to deregulation and controlled spending would keep foreign investment coming to the country.
"Investors will react pretty well," in the future, he said.
The benchmark TA-25 Index ended the week at 805.20 on Thursday, the highest since August 24. The index, while down 2% for the year, is up 0.6% since hostilities with Hizbullah ended.