Fischer: You Can Bet on a Recession

Bank of Israel Governor Stanley Fischer yesterday said a recession in the long term is likely, and that external financing sources would be the key to pulling out of it. "It would be very bad if we should find ourselves like in 2002-2003 without external financing," he stressed. "It will be impossible to jump-start the economy because markets abroad will not be prepared to finance our expenses."

Fischer deems it essential "to roll back the burden of debt on GDP to insulate the economy from disruptions, to make space for other important needs of the economy, and to allow the government to implement an anti-cyclical policy in time of need." Fischer delivered his speech while presenting the central bank's 2006 report to the Knesset Finance Committee.

The central bank commented after the meeting that the governor was not making a forecast but rather describing the global situation. It noted that all business cycles endure recessions after several years of growth.

The central bank governor advised exploiting the economic good times to begin reducing debt steadily to the levels more acceptable worldwide, around 60 percent of GDP.

Fischer stressed "2006 was one of the Israeli economy's most successful years in recent times." He pointed to rapid growth, lower unemployment and an impressive surplus in the balance of payments. Likewise stable prices and finances characterized the economy. He noted the global growth provided a tail wind for the local economy, "and all this despite a year in which there was a war in Lebanon."

Despite the positive news, Fischer reminded the committee of three areas still in need of work. "The level of unemployment is still relatively high. The weight of public debt on GDP is still heavy, and the level of poverty is still high." He called for macroeconomic policy to focus on its main target of retaining rapid growth.

Continued success of the economy this year, according to the governor, depends on three factors: "developments in the global economy over which we have no influence, the geopolitical situation over which we have partial control and maintaining the economic strategy the government has used in recent years, over which we have full control."

He added every time he talks with investors or analysts from abroad, they ask him how the economy can be so good despite all the political problems. "My answer is the global economy is growing at an impressive rate. The government succeeds in continuing to preserve budgetary discipline, and the Bank of Israel keeps its finger on the pulse and tries to meet the inflationary goal while contributing to economic growth and supporting financial stability."

Commenting on yesterday's report in TheMarker that Israel is joining the OECD, the governor said, "The organization in in the process of deciding about the number of new states ahead of its ministers conference in May." He confirmed his bank is working toward Israel's participation in the major economic body and emphasized the importance working toward this aim.

Fischer told the committee the central bank would not intervene regarding the exchange rate with the dollar. He would not comment on an immediate interest rate hike but said with a smile that he expected sometime before the end of his term in three years he would raise interest rates