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