Taking Stock / Perspectives on 4.2% Growth

1. According to preliminary figures, Israel's economy grew by 4.2 percent in 2004, says the Central Bureau of Statistics.

Unarguably, Israel's economy surprised on the upside last year. Few expected growth that robust. This is a good time to apologize to Finance Minister Benjamin Netanyahu, who was roundly lashed for declaring in November 2003 that the recession was over.

2. Leaving aside 2000, when the high-tech bubble blew GDP growth out of proportion, Israel's economy hasn't grown this fast in a decade. The last time we saw expansion of more than 4 percent was in 1994 and 1995, when the economy was spurred by the massive influx of Jews from the deteriorating Soviet states, and the peace process.

3. For the first time in years, Israel's economy grew faster than the economies of the OECD nations, faster than the economies of Canada and Britain. This comparison, however, is misleading. The real question is how fast GDP per capita increased, because that directly describes the real improvement in our standard of living.

In 2004, Israel's GDP per capita grew by 2.4 percent, lower than the OECD average of 2.8 percent, and lower than the GDP per capita growth in the United States too. Putting aside the bubble year 2000, in every single year of the last decade, Israel has lagged behind the rest of the world in terms of GDP per capita.

4. As the economy expanded, unemployment receded. At the end of 2003, unemployment among civilian adults peaked at 10.9 percent of the workforce, and today it is 10.1 percent.

But again, international comparisons arouse intense frustration. Again, Israel takes the cake, and it's a bitter one. Unemployment in the United States is half the Israeli rate; and in Israel, it's 25 percent above the rate in the European Union. Even the nations infamous for their high joblessness, namely France and Germany, are doing better than Israel.

5. Exports were the main engine driving growth in 2004. Some 14 percent growth in exports lifted the scope to $50 billion. High-tech again posted the fastest growth, and revenue from tourism shot up 30 percent. But it is still a fraction of the figures posted in the two years before the intifada.

6. After two years of steep decline and one year of leveling off, private consumption increased in 2004 by about 5 percent, which is 3.5 percent in per capita terms. This constitutes the fastest pace of growth in 10 years - again leaving out the bubble year. Most of the increase was in the field of durables, in which consumption leaped 16 percent.

7. Despite the impressive growth data, investments remain very low. The total figure dropped again, for the fourth year in a row, even though the security situation quietened down and interest rates declined. For years, the security situation and high interest have been blamed for depressing investments.

8. Scanty investment in machinery and plants are one reason why Israel's current account is in surplus for the second consecutive year. Major investment in an economy like Israel's usually leads to a surge in the importing of investment goods.

9. The greatest achievement of Netanyahu's economic policy was a sharp decline in public consumption in the last two years, after steep increases over years. But the road to be trodden remains long. Even though the government met its deficit target, its deficit remains frighteningly high.

Other than the crazy year of 2003, when the economy paid the price of profligate fiscal policy in 2001 and 2002, the government deficit in 2004 is the highest it has been in 10 years. One reason is that the finance minister is determined to pursue his policy of cutting taxes, and the tax burden as a percent of GDP continued to drop for the fourth year in a row.

10. Having examined all the economic parameters of 2004, it is clear why Netanyahu admitted in weekend interviews that the growth forecasts for 2005 were predicated on the U.S. economy remaining strong. Without the dramatic increase in exports, the high-tech rally and the foreign money, the year 2004 would have looked entirely different - and not for the better.