​Summary:

  • After five years of rapid growth, Israel's economy suffered a reversal in the second half of 2008, and started sliding towards a recession, against the background of the increase in the severity of the global crisis and its effects on the economy. Although GDP increased by an average of 4 percent over the year, in the fourth quarter it actually contracted.  
  • In the first part of the year, the trends that characterized the period of rapid growth continued– –a high level of economic activity, low unemployment, a surplus in the current account of the balance of payments, a high rate of saving, a significant cumulative reduction in the public debt/ GDP ratio, and a high level of profitability in the business sector.  
  • The effects of the crisis became more acute towards the end of the year, expressed in steep declines in exports and tax revenues and a decline in private consumption. Employment stopped rising, wages dropped, and unemployment started to climb.  
  • The turnaround was also evident in inflation: till September it was high, reflecting the increase in global oil and commodity prices and the excess demand in the economy, and then it declined sharply, in light of the fall in world prices and the moderation of excess demand. The CPI increased by 3.8 percent in 2008, exceeding the upper limit of the inflation target range.  
  • Monetary policy in 2008 closely reflected the effects of global developments––the changes in world prices and the changes in assessments of the seriousness of the crisis and its effects on Israel. From September the interest rate was reduced significantly several times, and it reached its lowest level ever. In 2008 the Bank of Israel bought considerable quantities of foreign currency to increase the level of the reserves, and against the background of rapid appreciation of the shekel.  
  • There was great upheaval in Israel's financial system, but it was moderate compared with the situation abroad. Prices of shares and corporate bonds fell, and spreads in the credit market widened considerably. The financial institutions, including the banks, exhibited resilience. The strongest impact was on the nonbank credit market, which became the principal risk of the financial system and the main cause of the contraction of the supply of credit.  
  • The public debt/GDP ratio declined further, albeit more slowly than before, and the deficit increased, due to the continued cuts in tax rates, the slowdown in activity, and the falls in the capital market, which had an adverse effect on tax revenues.  
  • The permeation of growth into the weaker sections of the population via the labor market was evident in the increase in employment among the low-educated, and was reflected in a reduction in the incidence of poverty in 2007 and the first half of 2008.  
  • There is a need for a policy to deal with the expected recession, aimed at minimizing its negative effect on growth, employment and welfare. It will be judged not only in the light of the decisions taken, but also in light of the ability to implement them quickly and on the required scale. In the financial area it is important that lessons be learned and implemented. Moreover, the policy must meet the long-term challenges facing the economy and society.  


The Economy and Economic Policy - Full File