(Bank of Israel)

Inflation data: The Consumer Price Index (CPI) for November declined by 0.4 percent, compared with forecasters’ projections for a decline of 0.2 percent, on average. Among the index components, there were marked declines in the fruit and vegetables, furniture, and food components, and a marked increase in the clothing and footwear component. The rate of inflation measured over the preceding 12 months was 1.9 percent, near the midpoint of the inflation target range.

Real economic activity: Data that became available this month indicate that the growth rate of the economy is stable, and there are even signs of some recovery in activity. Foreign trade data indicate an increase of 4 percent in goods imports, primarily of capital goods, and a decline of 1.5 percent in exports (excluding ships, aircraft and diamonds) in November. This decline followed three months of increases, so that trend data continues to indicate an increase in exports, led by high technology industries, primarily pharmaceuticals. Exports of business services (excluding start-up companies) increased by 2 percent in September, and posted similar growth in the third quarter.

The labor market: Labor Force Survey data for October indicate an increase of 0.4 percentage points in the labor force participation rate and in the employment rate among the principal working ages (25–64), so that the unemployment rate among this age group remained virtually unchanged at 5.3 percent. Similar trends were recorded among the general working-age population, and the overall unemployment rate declined to 5.9 percent. At the same time, there was a slight increase in the rate of those employed on a full time basis. The trend of increase in the number of employee posts in public services continued, with a decline in the number of employee posts in the business sector. Nominal wages increased by 0.9 percent, and real wages increased by 0.1 percent, in July-September, compared with April–June.

Budget data: In January-November, the cumulative deficit in the government’s domestic activity was NIS 13.8 billion below the seasonal path consistent with the deficit ceiling for 2013 of 4.65 percent of GDP. The below-path deficit primarily reflects an expenditure level which is NIS 10.2 billion lower than the path consistent with full performance of budget expenditures, and revenues which are NIS 3.6 billion above the path consistent with the revenue forecast in the budget. As such, the deficit in 2013 is expected to be around 3 percent of GDP.

Research Department Forecast: This month the Research Department updated its macroeconomic forecast. According to the revised forecast, the inflation rate in 2014 will be 1.8 percent, near the midpoint of the inflation target. The Bank of Israel interest rate is expected to reach 1.25 percent toward the end of 2014. GDP growth in 2013 is expected to be 3.5 percent (3.6 percent in the previous forecast), and 2.6 percent (similar to the previous forecast) excluding the effect of natural gas production from the Tamar site. For 2014, the growth rate is projected to be 3.3 percent (3.4 percent in the previous forecast), and excluding the effect of natural gas production, the growth rate is forecast to be 2.9 percent, compared with a projection of 2.7 percent in the previous forecast. Thus, excluding the effect of natural gas, the growth forecast for 2014 is an improvement over the previous forecast.

The foreign exchange market: From the monetary policy discussion on November 24, 2013, through December 20, 2013, the shekel strengthened by 1.2 percent against the dollar, while the dollar traded mixed against most other currencies. The shekel strengthened slightly, by 0.1 percent, against the euro, and appreciated by 1.1 percent in terms of the nominal effective exchange rate. Since the beginning of the year, the shekel has appreciated by 6.8 percent in terms of the nominal effective exchange rate, though most of the appreciation occurred in the first half of the year.