Flug: Economy worsened faster than expected

Karnit Flug  picture: Eyal Yitzhar
Karnit Flug picture: Eyal Yitzhar

Governor of the Bank of Israel Karnit Flug called on the government to take steps to promote growth in exports and productivity.

The economic picture in Israel has worsened faster than expected, Governor of the Bank of Israel Karnit Flug said in the press conference following the announcement of the interest rate decision for October. The Monetary Committee of the Bank of Israel decided to leave the rate unchanged, at 0.1%. Some analysts had predicted a rate cut. The Bank of Israel Research Department cut its growth forecast for2015by 0.4% points, to 2.6%, andby 0.4% points for 2016, to 3.3%

"The growth figures were surprisingly weak, and a further fall in inflation occurred because of energy and food prices," Flug said, adding that the 1% cut in the rate of VAT announced by the government would also delay the return of inflation to the target range. "The fall in inflation was mainly due to one-time factors," she said.

The Bank of Israel estimates that the VAT cut, the reduction in taxation on alcohol, cancellation of the television license fee, and the fall in fuel prices, will depress the September and October CPI readings by about 0.7% on an annual basis, and stresses that these are one-time effects resulting from unforeseen measures.

"The Monetary Committee estimates that the rate of growth has moderated somewhat. The national accounts data indicate a sharp fall in growth in the second quarter, led by exports and investment, and this picture sharpened with the release of the second estimate for these figures," Flug said.

"However," she continued, "the national accounts data were also affected to a large extent by one-time factors: the strike at Israel Chemicals had a significant effect on the goods exports figures, and there was a correction in the first two quarters of 2015 in the vehicle import figures, which shot up in late 2014. Discounting these two factors, a slight drop in the growth rate during 2015 emerges, and this is also in line with the decline in global trade.

"The foreign trade figures support the estimate that there has been a certain improvement in the third quarter. Furthermore, unemployment is low, rates of participation in the workforce are relatively high, and wages have risen by a real 3% in the past year. Nevertheless, over time, the stagnation in exports, the engine of growth and productivity in the Israeli economy, and in investment, is worrying. The low interest rate and the Bank of Israel's activity in the foreign exchange market support exports, but steps also need to be taken by the government to encourage exports and a continual rise in productivity, in order to bring about a change of trend in the rate of growth of exports," Flug concluded.

Published by Globes [online], Israel business news - www.globes-online.com - on September 24, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Karnit Flug  picture: Eyal Yitzhar
Karnit Flug picture: Eyal Yitzhar
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