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The Israeli economy is now officially in recession. GDP fell sharply by 3.6% in the first quarter of 2009, in annual terms, the Central Bureau of Statistics reported yesterday. This was much worse than most forecasts had predicted.

The official definition of recession is economic contraction - negative economic growth - for two consecutive quarters. Since GDP fell 0.5% in the last quarter of 2008, Israel now is officially in a recession.

All figures are in annualized terms.

The economy did grow 1.3% in the third quarter of last year, but the first three months of 2009 were Israel's worst since the third quarter of 2001.

The big drops were in goods and services exports, as well as in investments in fixed assets. Private consumption also dropped sharply, by 4.3%, and per capita consumer spending was down 6%. People spent much less on food, drinks and tobacco, as well as on durable household goods such as refrigerators, washing machines, air conditioners and furniture. Consumer expenditures on other items, such as vacations, clothing, household goods and medicine, fell by 4.3%.

Business production dropped 4.2% for the quarter - outpacing the GDP contraction - after losing 1.6% in the previous quarter.

Goods and services exports plummeted a whopping 46%, but imports fell even farther, by 62.7%. And the fall was across the board: Industrial exports fell 47.8%, agricultural exports were down 31.6% and tourism revenues fell a huge 75.4%. Diamond exports fell by only 11.4%.

One of the few increases in the period was in new car purchases, which were up 85.2%. There was a 3.5% increase in investments in residential construction, and a 22.8% rise in non-residential building.

In fact, housing prices actually rose about 5% for the quarter, as opposed to decreasing as in the rest of the world.

"Industry is in its worst crisis since the founding of the state," said Ori Yehudai, CEO of Frutarom and chairman of the Manufacturers' Association Economics Committee. He said 13,000 workers had lost their jobs in industry in the past year, mostly in the textile, plastics and clothing sectors. Another 8,000 will be fired by year's end if there is not a significant economic recovery, added Yehudai at a press conference in Jerusalem yesterday.

The worst is still ahead of us, Yehudai says: The Manufacturers Association forecasts a 2.1% decrease in economic activity this year, and a 3.8% drop in per-capita GDP. In addition, the association predicts a recovery will begin only in the middle of 2010, but not before unemployment reaches 10% by 2011.

Bank Hapoalim's purchasing managers index dropped 0.8% in April to 35.5%, constituting the 13th consecutive month in which the index lost ground.

The index's low level indicates expectations that industrial activity will continue to decline. All the components of the index continue to attest to low demand, but the components of demand for export, employment and prices did rise, attesting that contraction is slowing. But the items of domestic demand and production output continued to contract, as did inventory levels

Tal Levy and Arik Mirovsky contributed to this report.