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Data
on the activity of the principal industries
and the labor market reinforce the assessment
that since 1999 an economic recovery has been
under way, although unemployment has grown and
several indicators of activity slowed in the
last few months of the year. In the second
half of 1999 (henceforth the period reviewed)
activity accelerated in most industries. Some
of the acceleration was led by exports, while
the response of GDP to the expansion of demand
lagged behind that of imports of goods and
services. The rate of price increases in the
period reviewed was also below the 1999
inflation target, and inflation expectations
declined to their lowest annual level at the
end of the period reviewed. The
foreign-currency market remained relatively
calm, the exchange rate vis-a-vis the currency
basket was administered within the band, and
there was slight nominal shekel depreciation.
Manufacturing exports rose more rapidly in the
period reviewed than in the previous three
years, primarily in the high-tech industries,
which have led export growth in recent years.
The government's domestic deficit for 1999 as
a whole was slightly above the deficit target
set in the budget, and was somewhat below the
1998 deficit. At the beginning and end of the
period reviewed the nominal interest rate was
reduced by a cumulative 0.8 percentage points,
but the real interest rate remained relatively
high, and even rose-because the fall in
inflation expectations was more rapid than the
decline in nominal interest. As in 1998, in
the period reviewed macroeconomic developments
in Israel were closely connected with global
economic developments: the expansion of world
trade in 1999 helped to increase Israel's
exports, and hence the rise in the output of
export industries; the global decline in
inflation slowed the rate of increase of
tradables prices in Israel, and the subsequent
improvement in the terms of trade helped to
reduce the current-account deficit in the
balance of payments as well as to moderate
domestic price rises. Short-term interest
rates (e.g., Libor on the currencies
comprising the basket), which fell as an
annual average, rose during the period
reviewed, so that the spread between Israel
and abroad narrowed. Capital inflow continued
during the period reviewed. The Consumer Price
Index (CPI) rose by 3.5 percent in the period
reviewed, after rising steadily each month at
the beginning of the period (generating
uncertainty as to its trend) and declining
steeply in its last two months. Expectations
regarding price increases in the first four
months were above the annual inflation target
(as was the case throughout the first half of
1999), and in the last two months they fell
below the range of the annual target for 2000
(3-4 percent). The decline in inflation
expectations at the end of the year appears to
be connected with the overturn of fears of
accelerated depreciation, inter alia in view
of the appreciation of the shekel. The main
contribor to the decline in the rate at which
the CPI rose was the housing component, which
declined each month in 1999 after being the
major contributing factor to its rise in the
first two quarters. In fiscal policy, during
the period reviewed public consumption
expanded more rapidly than GDP - inter alia
because public services employment expanded. Despite
the accelerated growth of tax revenues
towards the end of 1999, they remained
below the forecast level, inter alia
because of the delay in concluding wage
agreements. For the year as a whole
there was a slight upward deviation from
the budget deficit, inter alia because
in the first four months of 1999 tax and
bond revenues were higher by NIS 3
billion than predicted by the updated
forecast prepared at the beginning of
September 1999. With regard to the
budget framework for the year 2000, on
the basis of the low forecast of
revenues made in September, and assuming
that the 1999 deficit will amount to 3
percent of GDP, it was decided that the
deficit target for 2000 would be 2.5
percent of GDP compared with the 1.75
percent arising from the deficit path
under the Budget Deficit Reduction Law.
As the reason for the lower deficit in
1999 than was forecast is the unexpected
rise in revenues, it is important to
keep expenditure at the level approved
by the Knesset in order to ensure that
the actual deficit continues to decline
in the year 2000, too. The labor market
remained slack, as it has been for a
long time, and in November the
unemployment rate rose to an annual peak
of 9,2 percent. Nonetheless, various
indicators, chiefly those relating to
the utilization of the labor force and
the depth of unemployment, point to the
possibility that the revival of economic
activity has begun to have an effect in
this area too, which generally responds
with a lag to swings in economic
activity. In 1999 the business sector
(especially manufacturing) did not
absorb the incremental labor force in
accordance with its relative share,
while the public sector, which increased
its workforce, made a substantial
contribution to the reduction of
unemployment. Despite the significant
rise in employment in 1999, the
unemployment rate grew, due to the
relatively large increase in the labor
supply as a result mainly of the greater
participation rate. Real wages per
employee post, which rose in the first
half of the year, also continued to grow
in the period reviewed, albeit at a
slower rate. In the business sector real
wages rose by some 3 percent - inter
alia because of the inflation surprise,
while in the public sector they fell in
real terms, inter alia because of the
delay in concluding wage agreements in
certain segments. In the area of
monetary policy, against the backdrop of
uncertainty regarding the inflation
environment for most of the year and the
narrowing interest-rate spread between
Israel and abroad, the Bank of Israel
persisted with its policy of gradually
reducing the interest rate in order to
consolidate inflation within the target
range for the next two years. The
nominal interest rate fell more slowly
than inflation expectations, while the
real interest rate rose. In the capital
market, as in many capital markets
abroad, share prices rose rapidly in the
period reviewed, and this the case for
all industries. The value of the stock
market grew considerably, and turnover
also rose gradually, although the extent
of share offerings on the capital market
remained relatively small
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