3. EXPECTED DEVELOPMENTS IN 1999-2002
3. EXPECTED DEVELOPMENTS IN 1999-2002
1. General
In 2000-2002 the growth rate is expected to accelerate gradually. Factors crucial for growth in the coming years will be exports, including manufacturing and tourist exports, and investment. The extent of Israel's foreign trade, which is expanding as restrictions on flows of capital, goods, and services are lifted, intensifies the economy's exposure to international developments. It is assumed that the international environment will serve to stimulate growth, and that trade will continue to expand. Nonetheless, an unstable world economic environment could increase uncertainty, and this would have severe repercussions on domestic economic developments.
Since Israel is at a turning point prior to the acceleration of growth, it is difficult at this stage to assess the full extent of the positive effect of the process of growth on the various parameters, including its expansionary effect on private consumption and productivity. The forecast assumes the gradual expansion of private consumption.
The forecast national budget for the year 2000 is based on the assumption that the policy described in Chapter 2 will be implemented in full. The main 'target' scenario for 2001 and 2002 is contingent on economic reforms and fiscal policy that will serve to accelerate growth. This policy requires inter alia the reduction of public-sector economic involvement alongside the easing of the tax burden and rapid reduction of the budget deficit in accordance with the Budget Deficit Reduction Law, a greater share of GDP invested in the infrastructure, and rationalization of the tax system. Adherence to this policy is a precondition for attaining growth, as presented below in the target scenario. An 'alternative' scenario is also presented, reflecting only partial implementation of policy-adherence to the Budget Deficit Reduction Law but no reduction in the tax rate or increase in the share of GDP invested in the infrastructure.
2. Main developments expected in 2000
Some acceleration of the growth rate-to 3 percent, about 1 percentage point higher than it was in 1999-is expected in the year 2000. Business-sector product will increase by 3.3 percent. This growth rate is still below the potential derived from the increase in factors of production and productivity. The number of Israelis employed will rise by 2.5 percent, assuming that the number of foreign workers falls somewhat. Given the increase in productivity and gradual acceleration of GDP growth, the unemployment rate is expected to fall only slightly.
Exports of goods and services are expected to rise by a rapid 9.5 percent in 2000. This will be led by two main components: manufactured goods and tourism services. The expansion of world trade, the rise in productivity, and the lagged effect of the real depreciation in 1999 will serve to accelerate the rate of growth of exports.
Private consumption will expand more rapidly in 2000 than in 1999, but will remain more moderate than in the early 1990s. Private consumption will rise by 3.6 percent, but per capita consumption will grow by only 1.3 percent because of the relatively moderate growth rate of disposable income and the high unemployment rate. Note, however, that because economic activity appears to be at a turning point it is difficult at this stage to assess the impact of the response of private consumption to real economic changes.
The reversal of exceptional one-off investments (Intel, El-Al's fleet of planes, measures to avert the adverse effects of Y2K, and the rehabilitation of diamond stocks), which served to increase investments in 1999, will give rise to a contraction in investment next year. Factors that will serve to increase investments, however, include:
- The conclusion of the process of adjustment to the required growth in capital stock, after the slowdown in the immigration rate;
- The increased exposure of the economy to structural change that increases the discard rate of existing capital stock, on the one hand, and requires investment in expanding industries and areas of activity, on the other;
- Additional investment to supplement infrastructure investment.
These factors will moderate the decline in investments, enabling the continued growth of capital stock. Residential investment is expected to continue to fall, but at a significantly slower pace.
Domestic public consumption is expected to rise by 1.9 percent over 1999, so that per capita consumption and consumption as a share of GDP will decline.
As a result of Israel's increasing openness, the growth of exports is expressed in a parallel expansion of imports and the continued rise in the import component of economic activity. The growth rate of goods and services imports, excluding direct defense imports, will be 4.8 percent in 2000. These developments will serve to reduce the current account deficit by $ 1 billion, to $ 0.3 billion, after this rose by $ 0.6 billion to $ 1.3 billion in 1999.
The forecast for 2000 and 2001
The target scenario assumes that the economic policy described in Chapter 2 will be implemented. According to this scenario, the growth rate will accelerate, fulfilling Israel's growth potential. Business-sector product will rise by an annual average of 4.8 percent in 2001-2002. As a result of the acceleration of GDP growth, the unemployment rate will fall from 8.7 percent in 2000 to an annual average of 7.2 percent in 2001 and 2002 (6.8 percent at the end of 2002).
Fixed investment, which has declined steadily in recent years, will rise. Per capita consumption will rise at twice its rate in 2000, amounting to 2.6 percent, while per capita domestic public consumption will fall only slightly.
The growth rate of exports will be somewhat slower than in 2000, but will continue to be rapid-an annual average of 7.7 percent-leading the rise in uses. The increase in exports will be supported by the expansion of world trade, the persistence of the process of improving efficiency, and a rise in productivity. There will be some decline in tourism over the millennium year, but its level will remain higher than in the last few years. Civilian imports will grow by 6 percent, and as a result of these trends, the current account will be balanced.
The alternative scenario also assumes that the deficit target will ensure adherence to the Budget Deficit Reduction Law, but it does not include the measures that serve to stimulate the supply side. According to this scenario, too, per capita GDP is expected to grow, albeit at a more moderate rate.
