I have just received a summary of current financial activity in Israel, as distributed by the Economics Division of Israel’s London embassy. Bottom line: This is an economy that has suffered, but has survived. As one UK based journalist commented this week; Alistair Darling would kill for only a 1% or so reduction in GDP, which is what is predicted in Israel for 2009.

Only yesterday, it was reported that “The Israeli Procurement Managers Index rose by 9.5 points in June 2009 to 52.1%, the first time in 14 months that it has risen above the 50%.”

Yes, inflation peaked in June. Unemployemnt has breached 8%. For all that, the following data shows that there are very encouraging undercurrents supporting the Israeli economy.

Economic Summary

• MSCI Index revised its definition of Israel from emerging market status to a developed market status.
• On July 15th 2009 the budget for the years 2009 – 2010 was finally approved. It is the first time ever that the Knesset approves a budget for more than one year. The approved budget for 2009 is NIS 316.6 billion, and for 2010 NIS 321.5 billion.
• According to BoI press release, the negative trend in economic activity has begun to moderate.  
• The budget has continued to record a deficit in the first 5 months of 2009.
• The Central Bureau of Statistics (CBS) adjusted real GDP for Q1 2009 downward, yet nominal GDP was adjusted sharply upwards.
• Bank of Israel (BoI) leaves interest rate unchanged for the month of July.
• CPI increased in the month of May by 0.4%
• The rate of unemployment increased for the third consecutive quarter. Q1 2009 the rate was 7.6%.
• Following a 46% decline in 2008, the TA-25 Index has risen 25% in 2009.

The government has initiated several stimulus packages to address the difficult economic environment. The latest plan will expand guarantees for the banking system, create new funds for mid-size business and exporters, further institute negative income tax, reduce the number of foreign workers, implement structural reforms and increase investments in infrastructure.
 
Macro Focus
In the first five months of 2009 the budget deficit (excluding credit) was NIS 10.5 billion compared with a surplus of NIS 6 billion in the same period of 2008. This is principally a product of decreased tax revenues. Moreover, in May the government continued to act without an approved budget form the Knesset. Total government expenditure in the first five months of the year was lower than that permitted in the absence of an approved budget, and was NIS 7.8 billion less than that consistent with the full implementation of the expenditure in the 2009 budget proposal.
 
The CBS has issued a downward revision of growth rates for the last three quarters of 2009.
The CBS has issued a downward revision of growth rates for the last three quarters of 2009. 

In Q1 2009 real GDP was 0.5% below the forecast, yet nominal GDP was 3.6% higher, indicating a rise in prices. Consequently, inflation in the last four quarters now amounts to 8.2% based on GDP prices, whereas it only amounts to 3.4% based on the CPI. This difference largely reflects changes in oil prices which have had a larger impact on the CPI than GDP prices. It should be further noted that whilst growth rates were negative, the decline was significantly less than experienced in the US and Europe.
 
Whilst data on real activity in Israel support the BoI’s forecasts that the reduction in GDP is beginning to moderate, real activity is still expected to contract further in the next few months taking into account increases in the unemployment rate. The BoI asserts that a continued expansionary monetary policy supports the return of the economy to positive growth.
 
The rate of unemployment increased for the third quarter in succession climaxing at 7.6% in Q1 2009. The CBS published a figure of 7.8% unemployment for April and BoI forecasters believe this is set to continue rising. Real wage and nominal wage both increased by roughly 3% YoY in Q1 2009, following 3 consecutive quarters of real wage declines. Health tax revenues were 0.5% lower in April and May of this year than in the same months in 2008, largely reflecting a decline in wages and employment levels.
 
Consumption fell sharply in Israel during 2009. Private consumption decreased by 3.4% YoY with a decrease in consumption of durable goods forming a considerable part of this decline. Public consumption declined as well by 7.1% YoY, largely reflecting the absence of an approved budget to date.
 
Exports fell sharply by 37% YoY, reflecting the slowdown in the global economy as well as a delayed reaction to the real appreciation to the Shekel in H1 2008. Imports fell as well by 41.3% YoY. As a result the surplus in the current account of the balance of payments greatly increased in Q1 2009 to USD 2.7 billion, compared to a an average of less than USD 1 billion  in each of the preceding quarters. In the last four months, the current account totaled 2.1% of GDP. 
 
Foreign direct investments (FDI) totaled USD 1.7 billion in Q1 2009, compared to an average of USD 2.9 billion in the first 3 quarters of 2008. 
 
The industrial production index decreased in April by 1% and was down 11% on the 12 months ending in April. Whilst the trade and services indexes fell by 3% in April and 10% in the 12 months ending in April. 

Monetary Policy Focus
The CPI rose by 0.4% in May, in line with BoI forecasts. Since the beginning of 2009 the CPI has risen 1.2% and for the first time since December 2007 the inflation rate was within the target range at 2.8%. Yet, following changes in the tax rate and government-supervised prices including water prices, inflation is expected to be closer to the upper limit of the inflation target range.
 
In the period between the previous two monetary policy discussions, the shekel’s standing against the dollar and euro changed little, appreciating 1% and depreciated 1.1% respectively. The nominal effective exchange rate of the shekel (which shows the shekels change compared to that of its trading partners) declined by 0.3%. Whilst the shekel gained against the dollar more moderately than other currencies, the shekel-dollar and shekel-euro exchange rates were still highly volatile.
 
The BoI maintained the interest rate at 0.5% as expected. In its statement the bank noted that inflation expectations continued to be well contained, with taxes and an increase in regulation prices keeping inflation artificially high. Inflation has decreased by 2.8% in the past 12 months, following seventeen consecutive months of above 3% increases.
 
In an accompanying statement, the Bank reiterated its commitment to easing measures, namely the purchase of long dated government paper and foreign exchange with the goal of supporting financial conditions. It added that the negative trend in economic activity was moderating, as was the negative situation in the financial markets.
 
Micro Focus
IVC Research Centre reported that 122 Israeli Start-ups raised USD 279 million from local and foreign venture capital funds in Q2 2009. This figure is down 40% from the corresponding quarter of 2008 when 115 start-ups raised USD 465 million, yet 5% higher than the preceding quarter of 2009.
 
The Manufacturers Association of Israel has published findings from the Survey of Expectations forecasting further declines in industrial activity in Q3 2009, but the rate of decline has begun to slow. The survey rose to 96.6 points for Q3 expectations, up from 89.2 for Q2 and 74.3 for Q1. 100 points is the survey’s dividing line between a quarter of economic expansion and contraction.
 
Property Focus
London’s commercial property market has begun to show signs of recovery in Q2 2009. According to a report by Jones Lang LaSalle’s head of West End Markets Damian Corbett, this is partly a result of increased investment by Israeli property investors.
 
The report asserts that the volume of commercial property deals in Central London increased by 58% in Q2 with GBP 1.3 billion invested. Corbett added “during the second quarter of 2009 there was a large range of international purchases with 43% of investments coming from the Middle East and notable purchases from Israel. Corbett was referring to Israeli deals such as the purchase in May by Harel Insurance Investments and Financial Services Ltd and Clal Insurance Enterprises Holdings Ltd for GBP 40 million of a building in central London. Other examples cited included Nochi Danker’s IDB Holding Group and Israeli entrepreneur Gil Levy exploring further investment opportunities in the City.