​Summary:

Economic activity expanded in 2004, continuing the trend of recovery that had begun in the second half of 2003. The recovery of the economy is due to a great extent to the development in externalities - the resurgence of the global economy and the marked amelioration in Israel's security situation. These changes led to a sharp rise in demand, especially for exports, which grew particularly rapidly. The rally was expressed in the rapid growth rate of business-sector product, which was endemic throughout the principal industries as well as in the labor market: employment continued to rise, the unemployment rate fell throughout the year, and the average wage increased. The rise in total factor productivity (TFP) outstripped that in wages, so that unit labor cost declined.

TFP soared as a result of the increase in factor utilization, after its contraction during the recession had led to the creation of excess capacity. This excess, in conjunction with the policy of fiscal restraint and the fact that the recovery was led by exports, explains why the process has not yet been accompanied by significant pressure to raise prices, create real appreciation, and generate a current-account deficit in the balance of payments - features which generally characterize Israel's economy at times of economic expansion.

Economic policy in 2004 was distinguished by monetary expansion and the reduction of public expenditure alongside cuts in taxes. This policy, and the fact that its two targets - price stability and the deficit target - were attained, served to entrench financial stability and enable the process of economic recovery to become firmly established.

Despite the trend of recovery, the effects of the recession are still evident. Per capita GDP was still lower in 2004 than in 2000; the unemployment rate is higher than both Israel's long-term average, and the rate in developed countries; the level of per capita GDP declined in Israel relative to the OECD countries and the US, for the eighth year in succession.


The Economy: Output and the Principal Industries - PDF file