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Intifada hits Israeli economy -
GDP falls 2.9% in first half of 2002

Jerusalem Post
August 15, 2002


Israel's gross domestic product (GDP) fell 2.9% to about NIS 500 billion in full-year terms in the first half of this year compared to the same period last year, according to data released yesterday by the Central Bureau of Statistics.

The fall was an annualized at 0.4% compared to the second half of 2001, signaling a slow-down in the pace of the economy's stagnation,

The CBS said Palestinian terrorism and its ramifications was the main cause for the deteriorating Israeli economy, coupled with the hi-tech crisis.

From record GDP growth of 7.4% in 2000, the economy has registered a 1.8% fall in GDP in the first half of 2001 compared to the previous half and a 5.3% drop in the second half of 2001.

Present figures, although reflecting a continuation of this negative tendency, point to a slower pace of decline.

Business sector production fell 2.3% compared to 8.4% in the second half of 2001, and 3.9% in the first half of last year.

Petachia Bar-Shavit, head of research at Bank Hapoalim, Israel's largest bank, expressed optimism. "I don't know if the slower pace of stagnation points to an imminent turnaround, but I have a lot of confidence in Israel's economy in the long run," he said.

"We have so many talented people in electronics in biotech and other hi-tech fields. Not just relative to our size, I'm talking in absolute terms. Also, the shekel passed an important confidence test in past months. It held its own despite loose monetary policy. This shows that investors believe in Israel's potential."

But, according to Eylon Geda, head of research at Ilanot Batucha, an investment house, the 1.7% fall in private consumption in the second quarter of the year, compared to the first quarter, is a worrisome development.

"Israel's GDP, like the US's, is fueled by private consumption, which makes up 60% of total GDP," he said. "Even non-durables consumption, which is based on staple goods and is normally stable, fell 4.3% during the quarter. This shows a widening crack in consumer confidence. Supersol's poor results, which were 5% below analysts' expectations, were a harbinger of CBS's figures.

"We expect negative GDP of about 1.5% in 2002," Geda said.

The wave of lay-offs that has hit the hi-tech sector, unemployment at 10.5% or close to 300,000 people, and Palestinian terrorism have undermined Israelis' feeling of security and have led to the decrease in private consumption, according to Geda.

Per capita consumption fell 1.6% in the first half of the year, which reflects a 5.3% decrease in durables and a 1.2% drop in non-durables. Despite shrinking consumption, imports were up 6.8%. Geda said this was a rebound affect after a steep fall in imports of 12.6% in the second half of 2001.

Public consumption, fueled primarily by Israel's military expenditures, was up 10.7% in the first half of the year, while in the second quarter this figure actually fell by 1.9% compared to the previous quarter.

Investments in fixed assets such as housing, industry, and transportation declined in the first half 6.6%, while a rise of 10.9% was reported for the second quarter.

Bar-Shavit prescribed looser monetary and fiscal policies to pry the economy out of its rut.

"It's not popular to espouse Keynesian economics, but I believe that allowing the budget deficit to pass 4% of GDP in the short run could give a push to the economy. It's not exactly in line with Maastericht's guidelines, but it keeps us within striking distance so that when the political opportunity is ripe we'll be ready to enter the European Union. In 2000 we fulfilled four out of five of the Maastericht criteria for entering the Union. This shows we have the potential."

Geda agreed. "After the September 11 bombing, the US increased government spending in order to cushion its impact. It seems to have helped them fare the downturn".

Bank Hapoalim's Bar-Shavit noted that, "Keynes is famous for saying 'In the long run we all die'. But I say, 'In the long run Keynes is very alive'.

"In the short run interest rates must stay no lower than 7.5%. In the long run when we get back to inflation of about 3%, interest rates can be allowed to fall to 6%," he added.