Israel: Economy Grows 4.3% in 2004

UNCLAS SECTION 01 OF 02 TEL AVIV 001061

SIPDIS

SENSITIVE

E FOR PAUL REID

E.O. 12958: N/A
TAGS: ECON EFIN IS ECONOMY AND FINANCE GOI INTERNAL
SUBJECT: Israel: Economy Grows 4.3% in 2004


This cable is classified Sensitive but Unclassified. Please
handle accordingly.

--------------
Summary
--------------


1. (U) On February 14, the Central Bureau of Statistics
(CBS) published updated 2004 figures showing growth of 4.3%
for the year, a significant improvement over growth of 1.3%
in 2003. This compares well with 3.6% average growth in the
OECD during the year. Israeli GDP per capita increased by
2.5% in 2004, following three years of declines. Business
sector GDP increased by 6.2% (versus 1.7 percent in 2003),
more than making up for the 2% decrease in governmental
spending. A 14.6% increase in exports and 5.2% increase in
private sector consumption contributed significantly to the
improved economic picture. The bright picture was dimmed
only by the figures showing declines in both FDI and
investment in fixed assets during the year. Final growth
figures will be reported in March.

--------------
Exports as an Engine of Growth
--------------


2. (U) The 2004 Israeli economy was largely driven by
exports of goods and services, which increased by 14.6% and
totaled USD 50 billion. This built on the 6.2% increase in
exports the previous year, which followed negative export
growth in 2001 and 2002. Increases were seen in virtually
all key sectors. Industrial exports excluding diamonds,
which account for more than 52% of total exports of goods
and services, increased by 16.2 percent in 2004. The
resurgence of Israel's high-tech sector helped drive this
growth, with exports in this sector increasing more than 21%
during the year. Agricultural exports increased 18.3% in
2004, compared with growth of 5.8% in 2003.


3. (U) Interestingly, the largest percentage increase in
exports came in tourism, which is counted as a service
export. This grew 30% to USD 5.1 billion in 2004 versus USD
3.9 billion in 2003. Naturally, comparisons with 2003 must
be viewed in light of the very low level of tourism in the
run-up to the Iraq War. In fact, the 2004 level was
significantly lower than that of 1999 to 2000, when tourism
exports totaled USD 15 million and USD 12.8 million
respectively.

--------------
Israelis Consuming Again
--------------


4. (U) After exports, increasing private consumption
expenditure was the second most important component of
growth. This increased 5.2% in 2004, following two years of
minimal growth of 1.3% in 2003 and 1.1% in 2002. The
reasons for the improvement in the consumption picture was
an increase in the standard of living of 3.4 percent in
2004, compared with declines of 0.5 percent in 2003, and 0.9
percent in 2002. This resulted in large part from a 2%
increase in real wages (following two years of declines); a
decline in unemployment from 10.7% in 2003 to 10% as of
November 2004; and increased labor participation. The GOI's
reduction of purchase taxes on electronics and household
appliances, as well as the decrease in the VAT from 18% to
17%, also had a significant affect, leading to a 15.2%
increase in per capita expenditures on consumer durables.
This good news on the personal expenditure side was
reflected by data showing that consumer confidence rose
significantly in 2004, reaching a level of 89 points in
January 2005, the same level as before the outbreak of the
Intifada in September 2000.

--------------
Public Expenditures Continues to Decline
--------------


5. (U) Public sector expenditures continued to decline in
2004 by 2 percent in line with the 2003 Economic Recovery
Plan's objective to reduce the size of the public sector.
This followed a decline of 2 percent in 2003. The
expenditure reductions occurred in non-military spending,
primarily as a result of the Government's economic reform
plan.

--------------
Investment a Disappointment
--------------


6. (SBU) Investment was the only weak point in the 2004
economic numbers. Investment in fixed assets remained
sluggish, declining by 2.1 percent in 2004, following
declines of 7 percent in 2002 and 4.9 percent in 2003. The
decline was primarily due to weakness in the building
sector. Foreign domestic investment (FDI) fell
precipitously in 2004 to USD 1.6 billion from 3.9 billion in
2003, in part as a result of issues relating to accounting
classifications. The Bank of Israel in its December 27 rate
announcement said, "Investment remains the Achilles' heel of
the growth process in Israel."

--------------
2004 Budget Deficit 3.9%
--------------


7. (U) The budget deficit in 2004 totaled just under NIS
20.4 billion, equal to 3.9% of GDP, which is slightly below
the official GOI deficit target of NIS 20.6 billion, or 4%
of GDP. This represents a decline of NIS 7.3 billion from
the deficit of NIS 27.7 billion, or 5.6 percent in 2003.

--------------
BOI Brings Interest Rate to All-Time Low
--------------


8. (U) The Bank of Israel (BOI) maintained its policy of
decreasing rates whenever economic conditions permit in
order to encourage growth. This was explicitly stated in
the BOI's December 27th press release. "In the last two
years the Bank of Israel has changed the focus of its
interest-rate policy so as to support economic growth.
Within this framework the Bank reduced the interest rate
from 9.1 percent in December 2002 to the current rate of 3.7
percent." The BOI further reduced rates 0.2% at the end of
January 2005 to 3.5%, the lowest BOI rate in Israeli
history. It maintained this rate in February. These
declines have been made possible by 2004's low inflation
rate of 1.2%.

--------------
2004: The Year in Numbers
--------------


9. (U) Here is a compact statistical abstract of the
Israeli economy in 2004. All figures represent the
percentage change compared with the previous year.

2004 2003 2002
GDP 4.3 1.3 -0.7
GDP per capita 2.5 -0.5 -2.7
Business GDP 6.2 1.7 -2.6
Exports 14.6 6.2 -2.4
Imports 12.3 -1.8 -2.1
Private cons. Expen 5.2 1.3 1.1
Standard of living 3.4 -0.5 -0.9
Investment in fixed -2.1 -4.9 -7.0
Capital formation

KURTZER