Fischer: 'The Public Will Feel Less Wealthy This Year'

Bank of Israel Governor Stanley Fischer warned Israelis would feel less affluent in 2008 but emphasized that economic growth is expected to be higher than developed western economies.

At a press conference yesterday on the publication of the Bank of Israel's annual report for 2007, Bank of Israel Governor Stanley Fischer warned that the Israei public would feel less affluent in 2008, because of the falling stock market, but emphasized that economic growth is expected to be similar to the average of the past 30 years, which is higher than developed western economies, including the U.S. and Western Europe.

"According to the Bank of Israel's updated forecasts, the economy in 2008 will grow at a rate of 3.2%, and 3.4% in 2009, following growth rates of more than 5% over the past four years. This is a slowdown of growth, not a recession" Dr. Karnit Flug, director of the Bank of Israel's research department told TheMarker yesterday.

Dr. Flug added that business sector product is expected to increase in 2008 by 3.6%, and by 4.0% in 2009.

The central bank's initial 2008 forecasts, which were prepared in 2007, spoke of growth rates of 3.6%-4.4% this year. Flug said that the Israeli economy would suffer a slowdown this year because of two central factors - the sharp drop in global trade, and the sharp appreciation of the shekel, about 9%, against the average basket of currencies in 2007. Erosion of the public's financial assets which also affects its "perceived wealth," will be reflected in the public's pattern of consumption and contribute to the slowdown of economic growth, she added.

"The Israeli economy is very much exposed to developments in the U.S. economy, and the U.S. economy is slowing down" Flug said. "The Israeli economy is also very exposed to the global economy, and forecasts for the global economy are also being lowered. There will be a substantial slowdown in global trade. As a free economy, Israel will be affected by this slowdown. The International Monetary Fund will be publishing its updated forecasts for economies of developed countries, including lowered forecasts for the Israeli economy."

At turning points, which is where we stand now, uncertainty is greater, Flug warned. The trends of recent months have become less reliable indicators. "We have initial indications of an economic slowdown. In the as yet unpublished companies survey for the first quarter of 2008, we can see a slowdown of activity in most branches of the business sector, industry, construction, business services, transportation and communication."

Flug emphasized that Israel saw a substantial drop in unemployment in 2007, together with increased rates of participation in the work force. The Bank of Israel anticipates that overall unemployment rates in 2008 and 2009 will reach 7.4%, meaning that the effect of the economic slowdown on unemployment will be moderate.

Average unemployment for 2007 was 7.3% of the civilian workforce, and the fourth quarter saw very low unemployment of 6.7%. Unemployment among workforce with 11-12 years of education, for instance, which constitutes about one third of the workforce, went from 14% in 2003 and 2004, to 9.4%.

"With the decrease of unemployment rates, participation in the workforce for this population increased. Workforce participation for workers with 0-10 years of education dropped every year until 2002, and unemployment rose. Reducing social security benefits for children pushed this population back into the workforce, and with economic growth, the percentage employed in this group increased. In other words, economic growth is trickling down to the weaker groups of the population."

Flug noted that the recovery of the tourism industry is important to employment rates, since the work is performed by less skilled workers. Nevertheless, it is difficult to explain why the residential construction sector is not recovering. "It's the only sector that has seen no real turnaround in four years of economic growth" she said.