Macroeconomic status assessment: The Israeli economy is suffering from a crisis in the real sphere and from unrest in the sphere of product and property prices. 2002 will be the second consecutive year in which the per capita product is expected to shrink in conjunction with a raise in prices that exceeds the target for 2002. In 2001 economic activity was diminished as a result of three factors operating simultaneously: an increase in terror in Israeli cities, a recession in the world economy, and a slump in the high technology industry.
At the beginning of the recession, the damage to economic activity was focused in industries that were directly affected by the security situation, such as the tourism industry, or affected by the world recession, which damaged the high technology industry. It would seem, however, that during 2001 the damage to economic activity gradually spread towards all the industries in the economy.
The causes of the current economic recession, which began in the last quarter of 2000, are unlike the factors responsible for the low growth rates in the years 1997 to 1999. The current recession is a result of external upheavals (the terror attack and world recession), whereas the previous one resulted from a mix of a policy of monetary restraint with a policy of fiscal restraint (along with the influence of the dwindling of the wave of immigration and financial crises in various parts of the world).
The detrimental effect of the security situation increased progressively towards the end of 2001, whereas the influence of world economic activity is showing initial signs of changing from negative to neutral or even somewhat positive. Global recovery might shed a negative light on the Israeli economy if Israel does not manage to ride the wave of recovery worldwide. At the beginning of 2001 the recession in Israel’s economic activity could be attributed to the global depression. It would appear that in 2002 the security situation has a notably negative effect on the level of economic activity, and this affects the perceptions of investors abroad.
Social stability: The crisis in the real sphere has struck Israel at one of its low points in terms of indices of social stability. Decision makers must take into account the effects of policy on the level of social stability. An unemployment rate of over 10 percent of the workforce is one manifestation of the country’s economic crisis. An unemployment rate this high also reflects social malaise that threatens stability. The unemployment rate in certain Arab localities and a number of development towns in the south is particularly high.
The poverty rate, which is relatively high in international terms, coupled with an exaggerated poverty rate among specific population groups (especially Arabs), arouses concern as to the health of Israeli society. The high level of economic inequality and poverty relative to countries around the world is partially explained by the low rate of participation of Israeli men who are of the main working ages (25 to 54).
The world environment: There is an increasing number of signs indicating that global economy is recovering from the recession from which it has been enmeshed since mid-2000. The composition of this recovery in the US economy is less favorable from the standpoint of the Israeli economy, since the development of Israeli export is more sensitive to investments in machinery, software and equipment and less so to consumption.
The four new industrial countries in Asia (Hong Kong, Korea, Singapore and Taiwan) are also showing signs of becoming extricated from the 2001 recession. In view of Israel’s similarity to these countries (which also went from high growth rates in 2000 to negative growth rates in 2001, in an even more pronounced manner), the International Monetary Fund forecast which anticipates a relatively quick recovery in these economies can be perceived as encouraging.
At this stage, Israel’s current crisis is unlike crises the country’s economy has suffered in the past. The expected world recovery, the low deficit in the balance of payments, the low external debt and the high foreign currency balances are some of the strengths that help to safeguard the stability of the local economy.
The forecast: According to the team’s as