"There is a noticeable weakness in private consumption, investments have fallen, and public spending has moderated," the Bank of Israel Research Department states in a report on monetary policy in the first half of 2014.
The figures are from before the start of Operation Protective Edge, so the central bank's main message is that the Israeli economy went into the period of conflict with a significant weakness in demand reflected in continued slowing of growth. The Bank of Israel is mainly concerned by the weakness in private sector growth, the economy's main engine. According to the data, in the first quarter of the year, GDP grew at an annual rate of just 2.9%, and private sector product at just 1.8%.
Further proof of the weakness in demand comes from price levels: the Consumer Price Index was unchanged in the first half of 2014 (it fell 0.2% according to trend data), while annual inflation (past twelve months) fell to just 0.5%, which is 0.5% below the government's price stability target range of 1-3%.
The bank points out that home prices continued to climb, and that in the twelve months to the end of May they rose by 8.8%. Since the end of 2012, home prices have risen at an annual rate of 7% to 10%. At the same time, there was a substantial fall in the number of transactions in homes in the first half of this year, among other things because of the expectation that the government will implement its program of 0% on home purchase for eligible groups and setting a target price for construction projects. The bank criticizes the Ministry of Finance's policy, particularly Minister of Finance Yair Lapid's flagship program of 0% VAT on first home purchases, warning that it "contributes to depressing demand for homes in the short term but reinforces it in the long term."
The bank again stresses that, despite the minister of finance's declarations that there will be no tax hike, the government will not be able to meet the deficit target (2.5% of GDP) without a rise in taxes and without budget spending cuts or deferral of spending plans. We should again recall that the report was written before Operation Protective Edge, and that these remarks will become all the more true after it. There is also likely to be heavy pressure to increase the defense budget, and the state has already undertaken to pay millions of shekels in compensation for indirect damage caused by the security situation in the south of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on August 4, 2014
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