A peace deal with the Palestinians could hike up Israel's gross domestic product by between 5% and 6%, Bank of Israel Governor Stanley Fischer said as peace talks began in Washington on Wednesday.

Prime Minister Benjamin Netanyahu, who met with U.S. President Barack Obama yesterday, has previously said peace was not necessarily linked to Israel's economic growth.

But Fischer, speaking at a World Jewish Congress board of governors meeting in Jerusalem on Wednesday, said he was convinced that Israel's economy would improve if the conflict with the Palestinians were resolved.

For all that no deal has been inked, the country's economic performance has been relatively good recently.

The 4.7% growth of the economy in the second quarter and the 6.2% unemployment rate reported Tuesday are good news, he said. The unemployment rate is lower than analysts had predicted, and jobless levels are approaching the rates before the global economic crisis.

Fischer said Israel underwent nothing worse than an economic slowdown. He said the country got through the global crisis with relative ease partly because it was already in good shape when the crisis began, with a sound fiscal policy and a balanced budget. In addition, Israel's public debt was on the decline compared with GDP, and it had a relatively low level of household debt.

In the long term, Israel faces challenges in the fields of employment and education, Fischer said.

Workforce participation among ultra-Orthodox men and Arab women is particularly low and must be boosted if the economy is to continue to grow, Fischer said. He noted the declining performance of Israeli students on international achievement tests and said that in addition to greater investment in education in general, the schools must provide all students with the skills they need to function in the modern workplace.

The central bank governor said monetary policy must continue to keep inflation within the target range of 1% to 3%. He said the primary risk came from the way developments in the world economy might affect Israeli exports and the country's GDP.

Weathering the crisis well

Countries that weathered the crisis well - including Israel, Canada, Australia, Hong Kong and Singapore - all had financial institutions that continued to function properly during the crisis, Fischer said. He said high-functioning markets are necessary for monetary policy to effectively influence the economy.

Another factor that helped Israel pull through the crisis was that the central bank decided in early 2008, when the prospect of a global recession was already on the horizon, to buy more foreign currency. This helped lower the value of the shekel, making exports cheaper for foreign consumers. This in turn affected the GDP, of which exports represent more than 40%.

Fischer said the Israeli business sector demonstrated flexibility, creativity and resourcefulness during the crisis. He attributed the relatively small rise in unemployment in part to flexibility in the local job market. The number of hours the average employee worked was reduced, heading off a larger rise in employment and helping employment rates return to pre-crisis levels more quickly.