Bank of Israel: A Recession in 2009

2009 will be a difficult year, a recession year, for the Israeli economy and its citizens; much worse, in fact, than all previous forecasts predicted.

Yesterday the Bank of Israel released its new economic forecast for 2009 and it shows Israel currently in a recession with negative economic growth of 0.2%. The central bank predicts unemployment will rise to 7.6% on average, the budget deficit will reach 4.1% of GDP and the ratio of national debt to GDP will rise to 82.3% by the end of the year.

Only in 2010 will economic growth restart, with the central bank forecasting 2.7% growth next year.

The central bank's previous forecasts, released just two months ago, predicted 2009 growth at 1.5% and unemployment at 7%. In comparison, the 2008 figures were 4.1% growth and 6.1% unemployment.

The Bank of Israel predicts that 2009 unemployment will rise by 46,000 to 231,000. In 2008, unemployment reached a 21-year low at 6.1%.

2007 was considered an excellent economic year, but unemployment still was at 7.3%, after falling from 8.4% in 2006. In general, unemployment lags behind the rest of the economy by half a year, both in entering the recession and leaving it. Employers wait to fire their veteran employees when things turn bad, and then wait to see if things have really improved before hiring again.

The central bank forecast shows the first half of this year to be the worst economically, with the largest drop in most economic indexes. However, the bank expects things to improve in the second half of the year with economic growth starting and then strengthening toward the end of the year. The economy is expected to return to full growth only in the middle of 2010.

The central bank predicts that business sector production will fall by 0.9%, compared to a rise of 4.4% in 2008. However, the public sector will grow by 1.2%, though this is down from 3.1% growth in 2008.

Exports are expected to fall by 6.9% this year.

Consumer spending will grow 1.1% this year, compared to 3.9% last year, and there will be no increase in employment despite a 3.2% gain last year.

The somewhat good news is that the Bank of Israel says the Israeli economy is in better shape than other Western, industrialized nations. This is due to Israel starting the world economic crisis in better shape than most developed countries. At the start of the crisis Israel had a positive balance of payments, a high level of private savings and a relatively stable banking system.

The Bank of Israel says private consumption will still increase this year, which will partially make up for the drop in other economic sectors.

The central bank says it downgraded its forecasts for 2009 for a number of reasons: The world economic crisis brought lower growth forecasts and trade everywhere; the decline in Israeli economic activity in the fourth quarter of 2008, which expressed itself in a sharp drop in industrial exports and imports; and damage to the tourism industry from the war in the south and the economic crisis.

The bank bases its expectations for improvement in 2010 on a recovery in the world economy, as trade increases and real interest rates fall.