Finance Ministry raises GDP forecast to 4.1%

Outlook cautiously optimistic ahead of elections.

The Ministry of Finance on Monday raised its economic growth forecast for 2006 to 4.1 percent from 3.9%, previously, though the improvement still represents a fairly cautious outlook mainly due to slower expansion of exports and moderate private spending. According to the Ministry's February report, gross domestic product, or GDP, in the business sector will grow by a mere 4.9% in 2006 just a touch more than the 4.8% predicted in the ministry's October forecast. "The Ministry of Finance has given a very cautious economic outlook pre-election time, which might change after the elections," said Shlomo Maoz, chief economist at Excellence Nessuah. "However, both the ministry and the Bank of Israel have revised their forecasts upwards," he noted, adding that a slowdown in exports might be expected to due to interest rate hikes. Meanwhile, he said, the ministry's forecast remained low compared with his investment house's forecast of just over 5% GDP growth. The Bank of Israel and The Economist, both have forecast previously that Israel's economy would grow by 4.3% this year, and business product by 5.2%. The ministry said in its February report that a slower expansion of exports, down to 4.4% from 6.6% in 2005, and a more stable consumer spending rate would be partly offset by rapid growth in investments in 2006. Further, government spending would stabilize and a slowdown of the 2005 pace of incoming tourism was expected in 2006. According to the report, investment was poised to grow 11.7% this year, up from a previous estimate of 10.5%, while investment in fixed assets would increase 4.7%, up from a previous forecast of 3.6%. Unemployment was expected to continue to come down in 2006 to a rate of 8.5% from 9.1%. The CPI index was seen rising to an annual average of 2.3% in 2006 compared with 1.1% in 2005. The Ministry of Finance warned, however, that for Israel to achieve the revised growth forecast, there must be no deterioration in the security situation. "One principle working assumption is that there will be no significant deterioration of the security situation in 2006. Should such deterioration occur, it will be manifested in a slowdown in growth in the tourism industry, certain harm to investments and private consumption and growth in defense spending beyond the planned level of spending," the report said. In addition, continuing worldwide growth and an increase in global trade was assumed with the US economy projected to grow by 3.3% in 2006 and the euro zone by 1.9%.