The Bank of Israel has lowered its growth estimate for the economy in 2008 to 3.2 percent, down from the previous forecast of 3.5%, on expectations that a deepening global economic slowdown will impact the local economy. "There is no doubt the Israeli economy will be affected by the global financial crisis and the slowdown in the global economy," Bank of Israel Governor Stanley Fischer said Tuesday at a press conference in Jerusalem at which he presented the central bank's annual report for 2007. "After four years of rapid growth, the economy is this year forecasted to grow at a lower rate of 3.2%, which is still much higher than economic growth forecasts in the US and Europe." Although growth will slow, the economy will expand, he emphasized, adding that there were no signs of a recession. The central bank's growth forecast for 2008 has grown more pessimistic over the past months, while the Finance Ministry has been sticking to its growth forecast of 4.2%. For 2009, the Bank of Israel forecasts an economic growth rate of 3.4%. According to central bank estimates, declining global demand and US economic growth, together with rising commodity prices, will slow exports to a growth rate of 4.2% in 2008, half its pace of last year. Consumer spending is forecasted to grow at a slower rate of 3.4%, down from 6.6%. For the first time in five years, the bank expects the unemployment rate to rise moderately to 7.4%, following continuous declines from 10.7% in 2003 to 7.3% in 2007. The central bank said positive developments continued in many spheres in 2007: GDP rose by 5.3%, led by the business sector; there was rapid expansion of exports; unemployment plunged to its lowest level in a decade. Earlier on Tuesday, Fischer presented the bank's annual report to Prime Minister Ehud Olmert. "We are optimistic about growth for this coming year, which we expect to continue, although at a lower pace than in previous years," Olmert said. Fischer said Israel's economy was in good shape to weather the global economic downturn, provided responsible interest rates and budget policies are maintained. "Adherence to tight fiscal targets the government has set itself is the key to continued growth," he said. In the report, the central bank cautioned the government over decisions taken in 2007 to implement multi-annual programs that are expected to exceed the government spending ceiling of 1.7% and boost the budget deficit. "In 2007, the government resolved to implement multi-annual programs in the fields of social services, welfare, infrastructure and defense," the report said. "If these programs are carried out in full, government expenditure will increase on average by 4% per year between 2009 and 2012. If expenditure is allowed to increase in the manner reflected in the multi-annual programs without adjustments, the deficit will increase and the decline of the debt/GDP ratio will halt in coming years." The central bank urged the government to explain how it intends to reconcile the cost of these programs with the legally mandated expenditure ceiling, in order to consolidate both the credibility of its fiscal targets and its commitment to the programs. Olmert said the government would maintain budget discipline and keep to the government's fiscal targets, even if this required making tough decisions. The report warned that the impact of the global financial crisis on the local market would be more significant, and recommended that supervisory bodies in the local financial system prepare for financial crises. "Until the end of 2007, the effect of the global financial crisis on Israel's financial system was moderate, but its effect may be more significant in the future," the report said. "The regulation and supervision of institutional investors, especially insurance firms, and their management of risks and exposure, should be augmented.... Action should be taken to increase competition and reduce concentration in the field of financial services to households." President Shimon Peres, who Fischer visited earlier in the day at Beit Hanassi, said it was the best report he had ever seen, because it covered the whole picture and not just the growth aspect. He said Fischer had demonstrated great wisdom. One of the main reasons to be satisfied with the report, Peres said, was that despite a heavy defense budget, the economy had flourished. The wide socioeconomic gap, he said, was not just an economic problem, but a social one that needed to be addressed as quickly as possible. Bureaucratic red tape needed to be reduced to enable speedier implementation of projects, he said. Greer Fay Cashman contributed to this report.