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Economy Expanding, Employment Up

Bank of Israel decides to leave interest rate unchanged for July at 3.25 percent to support further growth, while maintaining stability.
By Gil Ronen
First Publish: 6/27/2011, 9:31 PM / Last Update: 6/27/2011, 9:40 PM

Flash 90

The Israeli economy is continuing to expand and employment is up, according to Bank of Israel statistics. The Bank decided to leave the interest rate unchanged at 3.25 percent for July.

Economic indicators that became available this month show that economic activity continued to expand in the second quarter, albeit more slowly than in the first quarter. At the beginning of this month the Bank of Israel revised its growth forecast for 2011 upwards, to 5.2 percent (compared with 4.5 percent in the previous forecast). The Central Bureau of Statistics trends survey reflects positive expectations of activity in the principal industries in the next few months. Consumer confidence indices declined a little this month but are still at a high level, expressing an optimistic view of economic activity.
 
The Bank of Israel staff forecast which was updated this month, is that inflation in 2011 will be above the upper limit of the target inflation range, and that it will decline to within the range in the first quarter of 2012. The interest rate is expected to increase gradually to about 4.1 percent in a year’s time (the average rate for the second quarter of 2012). 
 
Labor market data indicate a continued expansionary trend in employment and a drop in unemployment, with a moderate increase in wages. According to trend figures for April, the percentage of unemployed continued to fall, and reached 5.8 percent of the civilian workforce. The nominal wage increased in January–March by 0.8 percent compared with the level in the previous three months, while the real wage dropped by 0.9 percent (seasonally adjusted). 
 
The inflation rate over the last 12 months was 4.1 percent, above the upper limit of the target inflation range (of 1–3 percent a year). The Consumer Price Index (CPI) rose by 0.5 percent in May, in line with the forecasts and at the upper limit of the seasonal path consistent with achieving the inflation target.
 
The rapid increase in housing and food prices, which continued this month, contributed to the increase in the index. The index excluding housing rose by 0.2 percent in May. 
 
Health tax receipts in May, which provide an indication of wage payments in that month, were 7.6 percent higher, in nominal terms, than in May 2010. The minimum monthly wage is scheduled to increase from NIS 3,900 to NIS 4,100 at the beginning of July.
Tax revenues in January–May were 7.4 percent higher, in real terms, than the corresponding period last year. 
 
Most macroeconomic figures published this month continued to point to a slowing in the pace of the global economic recovery. Most of the weakness is focused in the U.S., Europe (excluding Germany), and several East Asian economies. As a result, investment houses revised downward their forecast of world economic growth. With that, the OECD and IMF emphasize that recent weakness is temporary, and the central scenario in the forecasts of both those institutions is for a slight acceleration in growth.