In Revised Outlook, Bank of Israel Projects Rosier Picture for This Year

Bank of Israel expects the gross domestic product to rise by 4 percent by the end of year; projects 6 percent unemployment rate in 2011.

The Bank of Israel yesterday revised its forecasts for this year, projecting a rosier picture than it did in April, but the Finance Ministry seems to believe the central bank's projections are overly optimistic.

The Bank of Israel expects the gross domestic product to increase by 4% by the end of the year, not much higher than its previous prediction of 3.7%, and that unemployment will run at 6.3% this year and 6% in 2011, after it fell sharply in the second quarter.

The central bank had initially projected unemployment would reach 7% this year and 6.7% next year.

Fischer and Steinitz - Appelbaum - Sept 29, 2010
Tomer Appelbaum

A senior treasury official said yesterday that export figures from recent months do not support the projection, and most analysts have expressed the view that the second half of the year will be worse than the first half.

Treasury sees 2010 figures as too optimistic

But while the Bank of Israel is predicting rapid economic growth in the third quarter, it expects the growth to slow after that, reaching 3.8% in the fourth quarter and remaining at that level in 2011. The central bank had previously predicted 4% growth in the fourth quarter.

The bank said the revision was based on second-quarter data from Israel as well as growth and trade projections abroad. Among the factors in the lower growth forecast for next year were the slowing of the growth of exports, lower expectations from the American economy and slower growth of private consumption.

Lower growth forecast for 2011

The central bank expects Israel to run a current account surplus of about $6.8 billion this year.

"The rapid economic growth in 2010 and the low unemployment rate in the second quarter (6.2% ) point to the continued narrowing of the 'output gap' that had opened during the global crisis," the central bank wrote.

As consumption drops, it expects Israel to run a current account surplus of about $5.3 billion in 2011, down from a $7.5 billion current account surplus last year.

Despite a contrary recommendation by Finance Minister Yuval Steinitz, Bank of Israel Governor Stanley Fischer announced a 0.25% increase in interest rates Monday, to 2%.

Steinitz, who has no official say in the setting of interest rates, told senior ministry officials last week that the hike would force the central bank to resume its intervention in the foreign currency markets.