Bank of Israel Annual Report, 2009
The Israeli Economy and Economic Policy - Summary
Israel's economy came through the global economic crisis - the worst since the 1930s - relatively well. Following the contraction of economic activity at the end of 2008 and the beginning of 2009, the economy started to recover in the second quarter of the year.
GDP grew by 0.7 percent in 2009, the result of a 1.5 percent decline in the first half of the year and 3.3 percent growth in the second half. The rate of unemployment reached 7.9 percent around the middle of the year, and fell to 7.3 percent by the end of the year.
Exports shrank by 12.5 percent, and imports by 14 percent, in line with the drop in world trade. The terms of trade improved, leading to an increase in the surplus on the current account to $7.2 billion, and mitigated the effect of the global crisis on national income and domestic demand.
Private consumption recovered rapidly, and by the end of 2009 it surpassed its pre-crisis level, contrary to the development in many other advanced economies.
The crisis had a limited effect on Israel's financial system, more moderate than its impact on the advanced economies, and the main financial institutions remained stable. The profitability and the capital ratio of the banking system improved during the year.
The factors contributing to the milder effect included a conservative financial system, and in particular a conservative and closely supervised banking system, a balanced housing market, and a successful economic policy.
Monetary policy was very expansionary, and in addition to the sharp reduction in the interest rate, it also involved intervention in the foreign currency market and the government bond market.
Inflation during 2009 was 3.9 percent, higher than the target inflation range and higher than the inflation environment in the advanced economies, due mainly to the rapid rise of housing prices and the increase in water prices and VAT by the government.
Fiscal policy was acyclic, and reflected the operation of the automatic stabilizers. The share of public expenditure in GDP remained unchanged, and the tax burden declined only because of the contraction of economic activity. The general government deficit was 5 percent of GDP.
Israel’s growth rate in the next few years will be heavily influenced by the rate of recovery of the global economy.