Abstract
The Israeli economy is performing exceptionally well, but still high public indebtedness calls for the continuation of strong economic policies. Monetary policy has successfully stabilized inflation expectations, but policy and communication challenges remain. The recent positive fiscal performance needs to be carried forward to improve international credibility. The government’s intention to stick with a rules-based approach to fiscal policy, solidly anchored in longer-term objectives, is commended. Enhanced fiscal transparency and governance are essential to improve the quality of policymaking.
This supplement 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.
1. Following downward revisions to growth forecasts for the United States and Europe, staff lowered its 2008 real GDP growth projection for Israel from 3.8 to 3.5 percent. While the latest conjunctural indicators do not show any weakness, the main reason for the downward revision is a fall in projected export growth, which would also slow investment and private consumption. Risks around the new projection are broadly balanced.
Change in Growth Rates Since Issuance of Staff Report, 2008
(Percent change, unless otherwise indicated)
Change in Growth Rates Since Issuance of Staff Report, 2008
(Percent change, unless otherwise indicated)
| Staff Report | Latest | ||
|---|---|---|---|
| Real GDP | 3.8 | 3.5 | |
| Exports of goods and services | 5.4 | 4.8 | |
| Goods | 6.1 | 5.0 | |
| Service | 5.1 | 4.7 | |
| Private consumption | 4.5 | 4.2 | |
| Investment (gross fixed capital formation) | 3.8 | 3.0 | |
| Current account balance (percent of GDP) | 2.4 | 2.3 | |
Change in Growth Rates Since Issuance of Staff Report, 2008
(Percent change, unless otherwise indicated)
| Staff Report | Latest | ||
|---|---|---|---|
| Real GDP | 3.8 | 3.5 | |
| Exports of goods and services | 5.4 | 4.8 | |
| Goods | 6.1 | 5.0 | |
| Service | 5.1 | 4.7 | |
| Private consumption | 4.5 | 4.2 | |
| Investment (gross fixed capital formation) | 3.8 | 3.0 | |
| Current account balance (percent of GDP) | 2.4 | 2.3 | |
2. The consumer price index rose by a larger-than-expected 0.6 percent in December on a monthly basis. This brought the (end-of-period) inflation rate for 2007 to 3.4 percent, above the 3 percent upper limit of the Bank of Israel target range, which was also the rate projected by staff. One reason for this upside surprise is that recent sheqel appreciations appear to have had a less deflationary impact than staff and others had projected.1
3. The sheqel has been appreciating since the issuance of the staff report, moving from a rate of 3.8 to close to 3.6 sheqel/US dollar. As a result, the sheqel is about 5 percent more appreciated than in staff’s central scenario for 2008Q1 (Box 2), which should diminish inflationary pressure. In the meantime, markets foresee policy rate hikes of just under 0.5 percent by end-2008, while inflation expectations are around 2.5 percent. In the staff’s view, the policy rate would probably have to be above the current 4.25 percent level once growth in trading partner countries reaccelerates, with a view to keeping inflation in the 1–3 percent target range. However, the latest appreciation of the sheqel, external downside risks to activity, and heightened risk premia argue for caution in raising rates over the near term.
Israeli Sheqel per U.S. dollar
Citation: IMF Staff Country Reports 2008, 062; 10.5089/9781451819649.002.A003
Source: Bloomberg.Israeli Sheqel per U.S. dollar
Citation: IMF Staff Country Reports 2008, 062; 10.5089/9781451819649.002.A003
Source: Bloomberg.Israeli Sheqel per U.S. dollar
Citation: IMF Staff Country Reports 2008, 062; 10.5089/9781451819649.002.A003
Source: Bloomberg.The standard assumption is that a 10 percent appreciation of the sheqel relative to the US dollar reduces prices by about 2 percent, but this appears to be diminishing.
