(Office of the Spokesperson and Economic Information, Bank of Israel)

• In the period reviewed, the four months September-December 2010, Israel's economy continued to grow, and both private consumption and investment increased. Exports continued to expand, but at a slower pace.
• The recovery of domestic economic activity encompassed most industries, and greatly improved the employment situation.
• Tax revenues increased rapidly, and the budget deficit was low relative to the deficits in the advanced economies.
• As in the past, this year too most government expenditure was made in the second half of the year, particularly in December. Also as in the last few years, defense expenditure exceeded the defense budget.

In the four months covered by this review, September-December 2010, Israel's economy continued to grow. The output gap narrowed and was almost closed, private consumption expanded, and investment, that had fallen during the crisis, increased at an impressive pace. GDP grew rapidly as a result of the widespread increase in demand that included most investment categories as well as current and durables consumption. Exports excluding diamonds continued to expand, but at a slower pace.

The expansion of domestic economic activity in the period reviewed covered most industries and improved the employment situation. The rate of participation in the labor force and the rate of employment reached unprecedentedly high levels, the depth of unemployment eased, and the number of employees working part time who would prefer full time employment dropped significantly. At the same time, the unemployment rate also increased in the third quarter.

Economic growth was also reflected in the steep increase in tax revenues. Direct and indirect tax revenues both increased faster than forecast in the budget, with much of the increase concentrated in taxes on imports. As a result, the domestic deficit was lower than the seasonal path consistent with the budget framework, and the total deficit in 2010 excluding credit was below the ceiling set in the budget, and was low compared with deficits in advanced economies.

Budgetary expenditure followed its usual pattern this year, and most government expenditure was carried out in the second half of the year. This seasonality is best seen in the high concentration of spending in December by the civilian government ministries. The defense budget is less seasonal, but 2010 was the sixth successive year in which defense expenditure exceeded the defense budget (including the defense budget items included in the budget reserve), and the second year in which there was such a deviation despite the fact that no large defense related incidents took place.

The leading economies around the world continued to recover from the crisis in the period reviewed, but their recovery was slower than Israel's and the unemployment rates in most of them remained high. The debt crisis in some European countries became more severe in the period reviewed. Due to the costs incurred in rescuing the tottering Irish banking system, Ireland had to request aid from the European Financial Stability Facility. The granting of the aid did not reduce the uncertainty in the markets regarding the stability of some European economies, and their CDS spreads remained high.