Statement by the IMF Staff Representative

This 2005 Article IV Consultation highlights that following a strong performance in 2004, Israel’s economic expansion accelerated in 2005, supported by a relatively favorable global economic environment, an improvement in the security situation, and prudent policies. Real GDP grew at an estimated 5.2 percent in 2005. Inflation is slightly higher than a year ago, but remains in check. The unemployment rate continues to fall, but remains high. The macroeconomic policies and structural reforms of recent years have opened up the economy, increased its competitiveness, and attracted foreign investment.

Abstract

This 2005 Article IV Consultation highlights that following a strong performance in 2004, Israel’s economic expansion accelerated in 2005, supported by a relatively favorable global economic environment, an improvement in the security situation, and prudent policies. Real GDP grew at an estimated 5.2 percent in 2005. Inflation is slightly higher than a year ago, but remains in check. The unemployment rate continues to fall, but remains high. The macroeconomic policies and structural reforms of recent years have opened up the economy, increased its competitiveness, and attracted foreign investment.

1. This statement contains information on recent economic developments in Israel that has become available since the circulation of the staff report for the Article IV consultation. The information does not alter the thrust of the staff appraisal.

2. The Central Bureau of Statistics (CBS) released the 2005 national accounts on March 15th. Real GDP grew by 5.2 percent, the same as the estimate provided in the staff report. However, the composition of growth changed somewhat, as seen in the table below:

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3. The Bank of Israel (BoI) kept its policy rate unchanged at 4.75 percent for the month of March. The BoI in its press statement said that while “interest rates in both the United States and Europe are likely to rise in March, the Bank of Israel does not believe that an increase in the interest-rate gap with the United States is needed at the present juncture to keep inflation within the target range.” The BoI views the interest rate gap as “an important determinant of the likely behavior of the exchange rate and consequent inflationary pressures, but does not believe that there is a unique level of the gap that is needed to maintain inflation within the target range set by the government.” Nonetheless, the BoI noted that expectations of increased interest rates around the world and the continued narrowing of Israel’s output gap “increase the probability that interest rates in Israel will rise somewhat during the remainder of the year.”

4. The latest reading of the consumer price index (CPI) showed that inflationary pressures are increasing somewhat, with the February CPI registering a monthly rise of 0.6 percent (3.1 percent yoy), with about half of the increase attributed to energy related items. The February figure followed three consecutive monthly declines in the CPI of 0.3 percent, 0.2 percent, and 0.1 percent in November 2005–January 2006, respectively. The staff’s view is that additional data points are needed in order to establish the extent to which the latest reading reflects a sustained increase in inflationary pressures. Based on currently available information, the staff’s baseline forecast points to a moderate overshooting of the inflation target band—on a year-over-year basis—during the first half of 2006, before inflation returns to within the band in the third quarter of this year.

5. The unemployment rate fell 0.1 percent in the last quarter of 2005, reaching 8.8 percent. According to the CBS, and based on preliminary trend data, the unemployment rate declined to 8.7 percent in the month of January. This is consistent with the staff’s projection for the 2006 average unemployment rate of 8.5 percent.

6. The CBS also released the 2005 balance of payments data, with the current account registering a surplus of US$2.4 billion (1.9 percent of GDP), up from US$1.8 billion (1.5 percent of GDP) in 2004.

Israel: Staff Report for the 2005 Article IV Consultation
Author: International Monetary Fund