hits Israeli economy -
GDP falls 2.9% in first half of 2002
By MATI WAGNER
August 15, 2002
Israel's gross domestic product (GDP) fell 2.9% to about NIS 500
billion in full-year terms in the first half of this year compared
to the same period last year, according to data released yesterday
by the Central Bureau of Statistics.
The fall was an annualized at 0.4% compared to the second half
of 2001, signaling a slow-down in the pace of the economy's stagnation,
The CBS said Palestinian terrorism and its ramifications was the
main cause for the deteriorating Israeli economy, coupled with the
From record GDP growth of 7.4% in 2000, the economy has registered
a 1.8% fall in GDP in the first half of 2001 compared to the previous
half and a 5.3% drop in the second half of 2001.
Present figures, although reflecting a continuation of this negative
tendency, point to a slower pace of decline.
Business sector production fell 2.3% compared to 8.4% in the second
half of 2001, and 3.9% in the first half of last year.
Petachia Bar-Shavit, head of research at Bank Hapoalim, Israel's
largest bank, expressed optimism. "I don't know if the slower
pace of stagnation points to an imminent turnaround, but I have
a lot of confidence in Israel's economy in the long run," he
"We have so many talented people in electronics in biotech
and other hi-tech fields. Not just relative to our size, I'm talking
in absolute terms. Also, the shekel passed an important confidence
test in past months. It held its own despite loose monetary policy.
This shows that investors believe in Israel's potential."
But, according to Eylon Geda, head of research at Ilanot Batucha,
an investment house, the 1.7% fall in private consumption in the
second quarter of the year, compared to the first quarter, is a
"Israel's GDP, like the US's, is fueled by private consumption,
which makes up 60% of total GDP," he said. "Even non-durables
consumption, which is based on staple goods and is normally stable,
fell 4.3% during the quarter. This shows a widening crack in consumer
confidence. Supersol's poor results, which were 5% below analysts'
expectations, were a harbinger of CBS's figures.
"We expect negative GDP of about 1.5% in 2002," Geda
The wave of lay-offs that has hit the hi-tech sector, unemployment
at 10.5% or close to 300,000 people, and Palestinian terrorism have
undermined Israelis' feeling of security and have led to the decrease
in private consumption, according to Geda.
Per capita consumption fell 1.6% in the first half of the year,
which reflects a 5.3% decrease in durables and a 1.2% drop in non-durables.
Despite shrinking consumption, imports were up 6.8%. Geda said this
was a rebound affect after a steep fall in imports of 12.6% in the
second half of 2001.
Public consumption, fueled primarily by Israel's military expenditures,
was up 10.7% in the first half of the year, while in the second
quarter this figure actually fell by 1.9% compared to the previous
Investments in fixed assets such as housing, industry, and transportation
declined in the first half 6.6%, while a rise of 10.9% was reported
for the second quarter.
Bar-Shavit prescribed looser monetary and fiscal policies to pry
the economy out of its rut.
"It's not popular to espouse Keynesian economics, but I believe
that allowing the budget deficit to pass 4% of GDP in the short
run could give a push to the economy. It's not exactly in line with
Maastericht's guidelines, but it keeps us within striking distance
so that when the political opportunity is ripe we'll be ready to
enter the European Union. In 2000 we fulfilled four out of five
of the Maastericht criteria for entering the Union. This shows we
have the potential."
Geda agreed. "After the September 11 bombing, the US increased
government spending in order to cushion its impact. It seems to
have helped them fare the downturn".
Bank Hapoalim's Bar-Shavit noted that, "Keynes is famous for
saying 'In the long run we all die'. But I say, 'In the long run
Keynes is very alive'.
"In the short run interest rates must stay no lower than 7.5%.
In the long run when we get back to inflation of about 3%, interest
rates can be allowed to fall to 6%," he added.