Bottom Shekel / A Long Way to Go Before It's Over

Now it is official: The Israeli economy is in recession. Two quarters of negative economic growth meet the standard definition - and the pundits have been right for the last six months.

Many were shocked by the numbers - a 3.6% drop in annualized GDP for the first quarter, despite forecasts of 1% to 2%. The last time there was such a fall was in 2001, due to the combination of the second intifada and the Internet bubble bust. But the bad news now is that the economy probably will continue to shrink for the next few quarters. The fall may not be so steep, but it will still be a drop. This means the recession will continue. For now there is no good news, and no one knows when the current state of affairs will end.

The Finance Ministry and the Bank of Israel had forecast negative economic growth for 2009 of 1% to 1.5% respectively, but yesterday the Manufacturers Association released its new estimate, of a 2.1% contraction. The International Monetary Fund last month predicted a 1.7% drop in GDP, but now the real numbers will force everyone to update their forecasts downward.

One of the more interesting numbers released by the Central Bureau of Statistics yesterday was per capita spending, which fell by no less than 6% in annual terms. And this number follows drops of 4.9% and 1.2% in final two quarters of 2008. This means that over nine months, Israelis cut back on spending per person by more than 12%. This is a direct effect of the economic situation, the drop in salaries, unemployment and the fear of unemployment.

There are two other frightening numbers in yesterday's national accounts: the falls in imports and exports. The drop came in all sectors, including high tech. More than 40% of GDP depends on exports.

In the end, Israel will recover from the world economic crisis only when the rest of the world does, and world trade recovers.