BOI: Israel to enter recession in 2009

Bank of Israel forecasts -0.2 growth in early '09, followed by stability, moderate growth later in year.

bank of israel 248.88 (photo credit: Ariel Jerozolimski)
bank of israel 248.88
(photo credit: Ariel Jerozolimski)
Israel will go into recession in 2009, a Bank of Israel statement on Sunday said. A negative growth rate of -0.2 percent is expected according to the BOI's new assessment. The previous forecast predicted a growth of 1.5%. The bank foresees a slight recession in the first half of 2009, followed by stability and a return to growth in the second half of the year and a return to the country's potential growth rate only by mid-2010. The bank said the forecast was adjusted in light of negative developments in the world economy as well as the Israeli market. Significant worsening in economic activity and a decline in the forecasts of global growth were among the factors contributing to the BOI's negative forecast. In Israel, the last quarter of 2008, which exhibited a decline in economic activity, a decline in industrial manufacture and export and the costs of Operation Cast Lead were contributing factors. A silver lining is to be found, however, in the form of improved conditions for external trade, especially due to the fall in the price of oil and adjusting the budgets allocated for public spending upwards, which will positively affect the market. The bank further predicted that the average unemployment rate in 2009 will be 7.6%, as compared with 7% in the previous forecast. While government deficit will grow to around 4% of the GDP, and the debt-to-production ratio will stand at 82% (compared with 79% in the previous forecast), the bank nevertheless assessed that existing surpluses would be kept at the same level despite the decline in economic activity, as a result of ameliorated trading conditions. The lowered forecast was produced in the wake of macro-economic data pointing at the direction the market will be taking, such as the combined Consumer Price Index (CPI) for December, the results of a survey of Israeli companies, a slowing down of production, a diminished export market and finally a wave of unemployment. A 3% rise in the number of job-seekers this December compared to the previous year highlights the staggering number of people - 17,500 - who were laid off at the end of 2008. That month marked a record in the country. The bank said that although the production per capita was predicted to diminish, the downward curve would be less steep than in other developed countries. This, the BOI said, was due to the relatively advantageous position of the Israeli market and a surplus in the balance of payments. A high rate of personal savings also contributes. The Israeli bank system is also cited as a factor moderating the decline in growth. The BOI expects banks to allow households to increase ongoing private spending and this should partially counteract the decline in demand for other types of spending. The BOI expects the world economy to stabilize by 2010 and bases its positive forecast for that year on this assumption; it warned, however, that if the tumult in the global economy will continue, it predicts a growth of 2% and an unemployment rate as high as 8%.