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On Thursday, the Bank of Israel increased its 2011 GDP growth forecast to 5.2 percent from 4.5 percent and lowered its unemployment rate forecast to 5.8 percent – lowest ever

The Bank of Israel’s growth forecast is in fact lower than the OECD forecast – 5.4 percent – announced earlier in the week. They are also predicting 4.2 percent GDP growth in the coming year and no change in the impressive unemployment rate.

The bank issued a statement saying:

“The rapid growth of GDP and use of resources in the first quarter, and in particular the surge in exports and fixed investment, resulted in an upward revision of most items. Despite the rapid increase in exports, the surplus in the current account of the balance of payments is expected to be significantly smaller than in the previous forecast, because of a faster increase in imports and a more severe deterioration in the terms of trade. The quarterly rates of growth are expected to slow a little in the course of the year as the economy converges to a full employment situation.”

And as for 2012:

“Exports are expected to continue increasing, at a rate slightly below that of world trade, due to both external forces – the deterioration in the terms of trade – and the level of the real exchange rate. The steep increase in capital stock, the result of the expansion of investment in 2011; and the continued rise in the rate of participation in the labor force to 58%, are expected to contribute to a growth rate in 2012 in excess of the potential rate, despite the fact that the economy is in a full employment environment.”

The prediction is 4 percent growth in private consumption for both this year and next; export growth (excluding diamonds) of 6.3 percent this year and 6.2 percent in 2012, import growth (not including defense and diamonds) of 11.5 percent and 6.7 percent respectively, and investment in fixed assets growth of 15.4 percent and 6.8 percent.

The forecast is evidence of stability in Israel’s geopolitical situation and continued smooth riding – knock on wood – in the global economy with no serious fiscal crises developing.

Meanwhile, in IMD’s World Competitiveness Yearbook (WCY) in 2011, Israel is number one in the world in total expenditures of R&D as percentage of GDP, central bank policy, entrepreneurship and scientific research. Also, in 2011 Israel was ranked by IMD, the second in the world in access to venture capital and public expenditure for education.

Good Days Ahead

Israel 1948
Another milestone en route to turning into a highly developed economy, Israel’s per capita GDP will reach $30,000 this summer and the overall gross domestic product will reach $230 billion.
In the first half of the decade The Jewish Country fully reached the $20,000 per capita GDP mark. It happened slowly and reticently; the recession of the second Intifada curbed economic growth and pushed the economy backwards.

Reaching the $30,000 per capita GDP mark partially reflects the increase in real national income in shekels, and the shekel’s strengthening against the dollar.

The state of the Israeli economy at this juncture is exceptionally good. Other economies whose per capita GDP is similar to ours – Spain, Greece, Portugal, and Britain – sustained harsh blows during the financial crisis. Their focus in the coming years will be on licking their wounds and attempting to extract themselves from the abyss of debt and deficit. Their recovery promises to be slow.

In six of the seven leading industrial powers, the ratio between government debt and GDP will grow by dozens of percentage points in the next few years. The debt will reach 90% of the GDP in Germany, 96% in France, 100% in Britain, 110% in the US, 130% in Italy, and 250% in Japan. In Spain, Greece, Portugal, and Ireland, the ratio will stabilize somewhere between the 100% to 150% mark.

Yet in Israel, the opposite should happen: debt will go down to only 70% of GDP. Israel’s banking system managed to overcome the past two years without taking a penny from the government.
Prime Minister Benjamin Netanyahu presented an ambitious goal for Israel: Joining the list of top 10 or 12 richest economies in the world. Based on today’s perspective, this target appears to be realistic. In order to make it happen, Israel needs to reach the $40,000 per capita GDP mark. To that end, the economy must grow at an annual rate of 6.5% in the next six to seven years, assuming that the shekel exchange rate won’t change much from its current level of about NIS 3.6 per dollar, and that the population will grow by 1.8% annually.

In the years 2003-2008, the economy in the Jewish Country grew at an average annual rate of 5.5%, and with a less convenient starting point and two wars in the middle.

The accelerated growth to happen in the coming years can be premised on the following: Tens of thousands of ultra-Orthodox men joining the workforce, boosting the production of Israeli Arabs, improving the quality of education and employment, massive investments in educational and physical infrastructure, expanding the export base and directing it to new markets, slowing down the growth of the defense budget, and removing bureaucratic obstacles.

The kibbutzim reinvented themselves and have again turned into an economic asset and a stalwart growth accelerator; the discovery of natural gas by businessman Yitzhak Tshuva frees Israel of the dependency on coal and dramatically brings down the cost of electricity production; the Arab sector is witnessing an unprecedented entrepreneurial business revolution, and Israeli software companies are taking over Africa.

Israel’s economic rather than military wings are spread and flying independently.

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