Identifier
Created
Classification
Origin
06TELAVIV295
2006-01-20 14:09:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:
SOLID FUNDAMENTALS KEEP ISRAELI ECONOMY ON GROWTH
how-toThis record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000295
SIPDIS
E.O. 12958: DECL: 01/19/2016
TAGS: ECON EFIN IS EIND EINV ETRD ECONOMY AND FINANCE
SUBJECT: SOLID FUNDAMENTALS KEEP ISRAELI ECONOMY ON GROWTH
TRACK
REF: TEL AVIV 56
Classified By: Economic Counselor William Weinstein for reasons 1.4 b a
nd d.
-------
Summary
-------
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000295
SIPDIS
E.O. 12958: DECL: 01/19/2016
TAGS: ECON EFIN IS EIND EINV ETRD ECONOMY AND FINANCE
SUBJECT: SOLID FUNDAMENTALS KEEP ISRAELI ECONOMY ON GROWTH
TRACK
REF: TEL AVIV 56
Classified By: Economic Counselor William Weinstein for reasons 1.4 b a
nd d.
--------------
Summary
--------------
1. (SBU) According to preliminary Central Bureau of
Statistics (CBS) data released on January 1, 2006, the
Israeli economy grew by 5.2 percent in 2005, and GDP per
capita (USD 17,800) increased by 3.3 percent. Following
growth rates of 1.7 percent in 2003 and 4.4 percent in 2004,
in the initial period of stabilization and recovery after the
deep recession of 2001 and 2002, the Israeli economy seems to
have returned to a trend of consistent growth. The figures
are also impressive in comparison with preliminary 2005
estimates of 2.7 percent growth and 2.0 percent per capita
growth, respectively, in OECD countries, and 3.6 percent and
2.6 percent, respectively, in the U.S. The Israeli business
sector was a major contributor, growing by 6.6 percent, up
slightly from 6.3 percent in 2004. Exports and private
consumption also grew strongly, as did foreign investment and
the balance of payments. The Gaza disengagement and
continued improvement in the security situation, the return
of high-tech as a growth engine, and the continuation of the
GOI's reformist economic policies all contributed to the
positive picture. Regardless of the situation created by
Prime Minister Sharon's illness and uncertainty regarding the
upcoming elections, Israel's strong economic fundamentals
remain in place for now, and it appears that the government's
fiscal policies will be maintained. End Summary.
-------------- --------------
Exports, Private Consumption, Business Sector Led Growth
-------------- --------------
2. (SBU) Exports of goods and services grew by seven percent
in 2005, compared to 17.4 percent in 2004, during the initial
recovery from the deep recession and high-tech downturn of
2001 - 2002, when exports of goods and services declined by
11.5 percent in 2001 and 2.4 percent in 2002. Tourism
revenues grew by 22.7 percent in 2005, compared to the 40
percent jump in 2004, which resulted from the dramatic
increase in tourism following the winding-down of the
intifada. Service and agricultural exports each increased by
more than ten percent in 2005, whereas exports of goods
increased by 5.6 percent. Bank Leumi, in its January 4
economic weekly, noted that exports of goods and services
represented 46 percent of total GDP for the year. This is an
increase from 44 percent in 2004 and 39 percent in 2003.
3. (C) Imports increased by 4.4 percent in 2005, compared
with 11.8 percent in 2004. The jump in 2004 was influenced
by three years of a cumulative decline in imports totaling
more than eight percent in the 2001 - 2003 period. Aharon
Blech, CBS Economist in Charge of National Accounts, told
Econ that the four percent increase in imports is in line
with export growth of seven percent. He did not view the
slowdown in import growth negatively.
4. (U) Private consumption increased by four percent in
2005, compared to the 2004 figure of five percent. The
largest growth in private consumption was in the purchase of
clothing, footwear, and personal effects, which increased by
10.2 percent, following an increase of 5.4 percent in 2004.
Consumption of consumer durables grew much more slowly than
in 2004, with an increase of only 3.4 percent, compared with
14.3 percent in 2004.
5. (C) Business GDP grew by 6.6 percent in 2005, virtually
unchanged from 2004's 6.3 percent increase. According to CBS
statistics, the transportation, storage, and communications
industries grew by 9.2 percent in 2005, following growth of
6.6 percent in 2004. The GDP of the wholesale, retail,
restaurant, and hotel sector (grouped together as one sector)
increased by 8.1 percent, compared to 6.1 percent in 2004.
The GDP of the finance and business services sector increased
by 6.4 percent in 2005, a continuation of 2004's 6.1 percent
growth rate. Blech noted that the business sector was the
most important factor in the growth picture and pointed out
that business operating profits grew by more that forty to
fifty percent compared to the prior year. In its macro
summary, Bank Leumi also noted that there was an increase in
the output of start-up companies in 2005, following a sharp
decline in the 2001 - 2003 period.
-------------- --------------
Government Spending Increased After Two Down Years
-------------- --------------
6. (C) General government expenditures increased by 2.7
percent in 2005, compared with declines of 2.3 percent in
2003 and 2.4 percent in 2004. (Note: This relates to the
expenditure of the Government, the National Insurance
Institute, local authorities, universities, government health
providers, and institutions such as the Jewish National Fund
and Jewish Agency for the purchase of goods and services and
employee wages. End Note.) Noteworthy is that defense
spending grew by 5.5 percent in 2005, compared with declines
of 5.6 percent in 2004 and six percent in 2003. Defense
imports grew by nineteen percent, compared with declines of
9.1 percent and 14.8 percent in 2004 and 2003, respectively.
Blech said that the increase in defense expenditures is due
both to spending on disengagement, as well as a return to
spending and purchasing after two years of cutbacks in the
Defense establishment.
--------------
Infrastructure Investment Ticks Up
--------------
7. (SBU) Fixed capital investment, which was negative from
2001 to 2004, continues to lag, although the one percent
increase in 2005 indicates that the worst may be over. The
most noteworthy positive trend is that investment in
construction, which includes road, railway, and sewage
infrastructure, increased by 3.2 percent in 2005. This
compares with declines of 9.9 percent in 2004 and 1.9 percent
in 2003. Dr. Yackov Sheinin, the CEO of Economic Models, has
said numerous times in interviews that only investment in
infrastructure will enable Israel to meet its true growth
potential. Over the past year, the GOI has announced several
new multi-year railway and road construction projects.
--------------
FDI, Current Account Balance Positive
--------------
8. (SBU) Bank of Israel statistics published on January 8
indicate that foreign investors have demonstrated increased
interest in the Israeli economy during the last year.
Foreign Direct Investment (FDI) totaled USD 5.7 billion, an
increase of 243 percent compared with FDI of USD 1.66 billion
in 2004, and exceeding the previous high of USD 5.1 billion
in 2000. The FDI volume reflects, in particular,
privatizations of government-owned companies, as well as
foreign acquisitions of Israeli companies. Foreign investors
also increased their participation in the domestic real
estate market, continuing a trend in recent years. Foreign
investment in real estate totaled USD 1.2 billion, compared
with USD 802 million in 2004 and USD 464 million in 2003.
There was also a significant inflow of portfolio investment
in 2005, with foreigners purchasing USD 2.1 billion worth of
shares traded on the Tel Aviv Stock Exchange (TASE),compared
with USD 483 million in 2004, a stunning four-fold increase
in one year alone. In addition, foreign investors purchased
more than USD 500 million of bonds traded on the TASE, almost
twelve times more than the USD 43 million purchased in 2004.
9. (C) Another positive trend signifying strength in the
economy is the growth in the current account balance since
2003, moving from less that one percent growth in 2003 to 1.2
percent in 2004 and 2.1 percent in 2005. This is
particularly impressive when compared to the deficit in the
U.S. current account, which increased from 5.7 percent in
2004 to 6.5 percent in 2005. Blech said that the current
account surplus translates into lower interest rates paid by
Israeli banks to borrow money in international markets,
enabling a reduction in the level of debt.
--------------
2006 Will Tell the Tale
--------------
10. (C) Blech was pleased with the 2005 results, and noted
that the numbers may even be adjusted slightly upwards when
the final results come out in March. He said that Israel's
good fortune at this time is that there is improvement in the
security situation and a strong upturn in high-tech, two
conditions which are very important for Israel's economic
performance. He also noted the connection between tourism
and foreign investment, two components that contribute
strongly to overall economic performance, but are very
dependent on the security situation.
--------------
The Recession was very Costly
--------------
11. (SBU) The general consensus among economists is that
Israel's economy is very strong and that its growth potential
is in the four percent to five percent range. Bank Leumi, in
its January 4 summary, notes that, given this assumption, the
economy lost approximately USD fifteen billion of its
potential GDP during the 2001 - 2003 recessionary period.
Leumi says that had Israel's economy continued to grow during
that period in accordance with this assessment, GDP per
capita would now be above USD 19,000, rather than USD 17,800.
--------------
All is Well, but Uncertainty Lies Ahead
--------------
12. (C) In light of Sharon's illness, the economic and
business sector seems to be encouraged by the appointment of
Finance Minister Ehud Olmert as Acting Prime Minister. It
appears to believe strongly in the team of Olmert and Bank of
Israel Governor Stanley Fischer as stewards of the economy is
these uncertain times. The financial markets have reacted
with restraint to Sharon's hospitalization in the belief that
his government's overall economic policies are likely to be
continued (see reftel). However, given the upcoming
Palestinian and Israeli elections, one cannot ignore the
turbulence that may lie ahead if things do not turn out as
expected.
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES
SIPDIS
E.O. 12958: DECL: 01/19/2016
TAGS: ECON EFIN IS EIND EINV ETRD ECONOMY AND FINANCE
SUBJECT: SOLID FUNDAMENTALS KEEP ISRAELI ECONOMY ON GROWTH
TRACK
REF: TEL AVIV 56
Classified By: Economic Counselor William Weinstein for reasons 1.4 b a
nd d.
--------------
Summary
--------------
1. (SBU) According to preliminary Central Bureau of
Statistics (CBS) data released on January 1, 2006, the
Israeli economy grew by 5.2 percent in 2005, and GDP per
capita (USD 17,800) increased by 3.3 percent. Following
growth rates of 1.7 percent in 2003 and 4.4 percent in 2004,
in the initial period of stabilization and recovery after the
deep recession of 2001 and 2002, the Israeli economy seems to
have returned to a trend of consistent growth. The figures
are also impressive in comparison with preliminary 2005
estimates of 2.7 percent growth and 2.0 percent per capita
growth, respectively, in OECD countries, and 3.6 percent and
2.6 percent, respectively, in the U.S. The Israeli business
sector was a major contributor, growing by 6.6 percent, up
slightly from 6.3 percent in 2004. Exports and private
consumption also grew strongly, as did foreign investment and
the balance of payments. The Gaza disengagement and
continued improvement in the security situation, the return
of high-tech as a growth engine, and the continuation of the
GOI's reformist economic policies all contributed to the
positive picture. Regardless of the situation created by
Prime Minister Sharon's illness and uncertainty regarding the
upcoming elections, Israel's strong economic fundamentals
remain in place for now, and it appears that the government's
fiscal policies will be maintained. End Summary.
-------------- --------------
Exports, Private Consumption, Business Sector Led Growth
-------------- --------------
2. (SBU) Exports of goods and services grew by seven percent
in 2005, compared to 17.4 percent in 2004, during the initial
recovery from the deep recession and high-tech downturn of
2001 - 2002, when exports of goods and services declined by
11.5 percent in 2001 and 2.4 percent in 2002. Tourism
revenues grew by 22.7 percent in 2005, compared to the 40
percent jump in 2004, which resulted from the dramatic
increase in tourism following the winding-down of the
intifada. Service and agricultural exports each increased by
more than ten percent in 2005, whereas exports of goods
increased by 5.6 percent. Bank Leumi, in its January 4
economic weekly, noted that exports of goods and services
represented 46 percent of total GDP for the year. This is an
increase from 44 percent in 2004 and 39 percent in 2003.
3. (C) Imports increased by 4.4 percent in 2005, compared
with 11.8 percent in 2004. The jump in 2004 was influenced
by three years of a cumulative decline in imports totaling
more than eight percent in the 2001 - 2003 period. Aharon
Blech, CBS Economist in Charge of National Accounts, told
Econ that the four percent increase in imports is in line
with export growth of seven percent. He did not view the
slowdown in import growth negatively.
4. (U) Private consumption increased by four percent in
2005, compared to the 2004 figure of five percent. The
largest growth in private consumption was in the purchase of
clothing, footwear, and personal effects, which increased by
10.2 percent, following an increase of 5.4 percent in 2004.
Consumption of consumer durables grew much more slowly than
in 2004, with an increase of only 3.4 percent, compared with
14.3 percent in 2004.
5. (C) Business GDP grew by 6.6 percent in 2005, virtually
unchanged from 2004's 6.3 percent increase. According to CBS
statistics, the transportation, storage, and communications
industries grew by 9.2 percent in 2005, following growth of
6.6 percent in 2004. The GDP of the wholesale, retail,
restaurant, and hotel sector (grouped together as one sector)
increased by 8.1 percent, compared to 6.1 percent in 2004.
The GDP of the finance and business services sector increased
by 6.4 percent in 2005, a continuation of 2004's 6.1 percent
growth rate. Blech noted that the business sector was the
most important factor in the growth picture and pointed out
that business operating profits grew by more that forty to
fifty percent compared to the prior year. In its macro
summary, Bank Leumi also noted that there was an increase in
the output of start-up companies in 2005, following a sharp
decline in the 2001 - 2003 period.
-------------- --------------
Government Spending Increased After Two Down Years
-------------- --------------
6. (C) General government expenditures increased by 2.7
percent in 2005, compared with declines of 2.3 percent in
2003 and 2.4 percent in 2004. (Note: This relates to the
expenditure of the Government, the National Insurance
Institute, local authorities, universities, government health
providers, and institutions such as the Jewish National Fund
and Jewish Agency for the purchase of goods and services and
employee wages. End Note.) Noteworthy is that defense
spending grew by 5.5 percent in 2005, compared with declines
of 5.6 percent in 2004 and six percent in 2003. Defense
imports grew by nineteen percent, compared with declines of
9.1 percent and 14.8 percent in 2004 and 2003, respectively.
Blech said that the increase in defense expenditures is due
both to spending on disengagement, as well as a return to
spending and purchasing after two years of cutbacks in the
Defense establishment.
--------------
Infrastructure Investment Ticks Up
--------------
7. (SBU) Fixed capital investment, which was negative from
2001 to 2004, continues to lag, although the one percent
increase in 2005 indicates that the worst may be over. The
most noteworthy positive trend is that investment in
construction, which includes road, railway, and sewage
infrastructure, increased by 3.2 percent in 2005. This
compares with declines of 9.9 percent in 2004 and 1.9 percent
in 2003. Dr. Yackov Sheinin, the CEO of Economic Models, has
said numerous times in interviews that only investment in
infrastructure will enable Israel to meet its true growth
potential. Over the past year, the GOI has announced several
new multi-year railway and road construction projects.
--------------
FDI, Current Account Balance Positive
--------------
8. (SBU) Bank of Israel statistics published on January 8
indicate that foreign investors have demonstrated increased
interest in the Israeli economy during the last year.
Foreign Direct Investment (FDI) totaled USD 5.7 billion, an
increase of 243 percent compared with FDI of USD 1.66 billion
in 2004, and exceeding the previous high of USD 5.1 billion
in 2000. The FDI volume reflects, in particular,
privatizations of government-owned companies, as well as
foreign acquisitions of Israeli companies. Foreign investors
also increased their participation in the domestic real
estate market, continuing a trend in recent years. Foreign
investment in real estate totaled USD 1.2 billion, compared
with USD 802 million in 2004 and USD 464 million in 2003.
There was also a significant inflow of portfolio investment
in 2005, with foreigners purchasing USD 2.1 billion worth of
shares traded on the Tel Aviv Stock Exchange (TASE),compared
with USD 483 million in 2004, a stunning four-fold increase
in one year alone. In addition, foreign investors purchased
more than USD 500 million of bonds traded on the TASE, almost
twelve times more than the USD 43 million purchased in 2004.
9. (C) Another positive trend signifying strength in the
economy is the growth in the current account balance since
2003, moving from less that one percent growth in 2003 to 1.2
percent in 2004 and 2.1 percent in 2005. This is
particularly impressive when compared to the deficit in the
U.S. current account, which increased from 5.7 percent in
2004 to 6.5 percent in 2005. Blech said that the current
account surplus translates into lower interest rates paid by
Israeli banks to borrow money in international markets,
enabling a reduction in the level of debt.
--------------
2006 Will Tell the Tale
--------------
10. (C) Blech was pleased with the 2005 results, and noted
that the numbers may even be adjusted slightly upwards when
the final results come out in March. He said that Israel's
good fortune at this time is that there is improvement in the
security situation and a strong upturn in high-tech, two
conditions which are very important for Israel's economic
performance. He also noted the connection between tourism
and foreign investment, two components that contribute
strongly to overall economic performance, but are very
dependent on the security situation.
--------------
The Recession was very Costly
--------------
11. (SBU) The general consensus among economists is that
Israel's economy is very strong and that its growth potential
is in the four percent to five percent range. Bank Leumi, in
its January 4 summary, notes that, given this assumption, the
economy lost approximately USD fifteen billion of its
potential GDP during the 2001 - 2003 recessionary period.
Leumi says that had Israel's economy continued to grow during
that period in accordance with this assessment, GDP per
capita would now be above USD 19,000, rather than USD 17,800.
--------------
All is Well, but Uncertainty Lies Ahead
--------------
12. (C) In light of Sharon's illness, the economic and
business sector seems to be encouraged by the appointment of
Finance Minister Ehud Olmert as Acting Prime Minister. It
appears to believe strongly in the team of Olmert and Bank of
Israel Governor Stanley Fischer as stewards of the economy is
these uncertain times. The financial markets have reacted
with restraint to Sharon's hospitalization in the belief that
his government's overall economic policies are likely to be
continued (see reftel). However, given the upcoming
Palestinian and Israeli elections, one cannot ignore the
turbulence that may lie ahead if things do not turn out as
expected.
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES