Bank of Israel Annual Report

2005

2 April 2006

2005 was a good year for Israel's economy: The economy grew rapidly, with growth led by the

business sector ; Employment rose, labor force participation rose, and

unemployment went down; the real wage rose moderately

The current account surplus increased, as did capital flows into and out of Israel;

The financial markets remained stable, with a rise in share prices, and structural changes were implemented in line with the reforms introduced in the last few years;

The stability of the financial system was accompanied by continued positive trends;

Macroeconomic policy achieved its numerical objectives––price stability, restraint in budget expenditure, and a reduction of the deficit, with a decline also in the public-debt/GDP ratio

GDP Growth (1990-2005)

3.92.6 2.7 2.5 2.5 2.4 2.6 2.7 2.4 2 1.8 1.7 1.8

2.0 4.4 3.92.8

1.1 1.3

-0.3

5.0

-2.6 -3.2

-0.1

2.73.4

-5

-3

-1

1

3

5

7

9

Per capita GDP

Population

5.2

4.4

1.71.2-0.3-

7.7

2.33.73.6

5.4

6.67.0

5.9

•SOURCE: Based on Central Bureau of Statistics data.

GDP and Business-Sector Product(1999-2005)

2.6

7.7

-0.3-1.2

1.7

4.45.2

2

9.7

-1.5

-3.3

2.5

6.3 6.6

-5

-3

-1

1

3

5

7

9

11

1999 2000 2001 2002 2003 2004 2005

GDP Business-sector product

•SOURCE: Central Bureau of Statistics.

Rate of Growth of Product of Principal Industries

(2005)

*The numbers in parentheses are the average shares in GDP in 2004–05.The industries shown comprise the business sector.SOURCE: Based on Central Bureau of Statistics data.

5.2

6.6

-0.2

4

5.9

4.6

6.5

-1

0

1

2

3

4

5

6

7

8

GDP*(100%) Business-sectorproduct(63.0%)

Construction(4.5%)

Manufacturing(13.7%)

Transport andcommunications

(6.9%)

Commerce,hotels andrestaurants

(10.4%)

Business andfinancial services

(24.2%)

%

The Share of Selected Industries in

Business-Sector Product (1995-2005)

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Commerce and servicesManufacturingConstruction

•SOURCE: Based on Central Bureau of Statistics data

58.3

21.2

7.0

How Growth was Reflected in the Labor Market:

The economy's rapid growth raised the number of employees, reduced unemployment, and increased the real wage.

The rise in the wage was again accompanied by a rise in labor productivity in 2005, and a reduction in unit labor cost.

About 60 percent of newly employed workers worked in the services and commerce industries; less than 10 percent in manufacturing.

Unemployment among the more highly educated declined and almost reached its natural level; this was reflected in a rise in the wage of Human-Cpital intensive industries.

Among the low educational level population unemployment went down, and the downward trend in the rate of participation in the labor force halted, but there was only a moderate rise in real wages in the unskilled-labor industries.

3.9 3.8

-1.2

1.4

5.5 5.6

4.6

-2

-1

0

1

2

3

4

5

6

7

Total(100%) Business sector(69.9%)

Construction(5.2%)

Manufacturing(15.9%)

Transport andcommunications

(6.5%)

Commerce,hotels andrestaurants

(18.0%)

Business andfinancial

services (16.7%)

%

*The numbers in parentheses are the average shares in the total in 2004–05.The industries shown comprise the business sector.SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

The Rate of Increase in the Number of Israelis Employed in Selected Industries

(2005)

Rate of Employment, rate of Unemployment, and Rate of Participation

1997-2005

%

SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

6.5

7

7.5

8

8.5

9

9.5

10

10.5

11

11.5

46.5

47.5

48.5

49.5

50.5

51.5

52.5

53.5

54.5

55.5Rate of unemployment Rate of participation Rate of employment

8.8

55.7

50.9

Rate of Participation in the Labor Force by Educational Level

52

57

62

67

72

77

82

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

29

30

31

32

33

34

35

3611--12 13-15 16+ Total 0-10

Number of years of education

77.3

65.6

30.2

54.2

55.3

Rates of Employment and Unemployment by Educational Level

2

4

6

8

10

12

14

16

18

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0-10 11--12 13-15 16+ Total

%

45

50

55

60

65

70

75

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

22

24

26

28

30

32

3411--12 13-15 16+ Total 0-10

Rate of employment Rate of unemployment

73.9

60.7

26.0

50.3

47.7

4.4

7.4

9.0

12.0

13.9

SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

Poverty Indices Commonly used relative index: the poverty line is

defined as half the level of the median disposable income adjusted for the number of persons. Updated yearly according to the median disposable income.

Absolute poverty index: the poverty line is defined as the income sufficient to consume a fixed basket of goods and services at a level determined for a base period (say 1997). The line is updated according to the Consumers Price Index.

Basic needs index: the poverty line is defined as the income sufficient to consume a basket of goods determined as being basic (food, shelter, education, transport, and personal items) according to the principles of proper nutrition and the consumption of those goods in predetermined percentiles.

16.1%

14.2%

12.7%

15.6%

16.6%

23.8%24.4%

24.8%

23.2%

20.9%

24.5%

26.0% 26.3%

21.6%

17.5%

17.7%

20.0%

19.6%18.8%18.8%

23.2%

13.0%

17.5% 17.4%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

1997 1998 1999 2000 2001 2002 2003 2004

1997 poverty linePoverty (by persons)Mixed Market Basket Method (MBM)

Alternative Poverty Measures

*SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

Sources and Uses(annual rates of change, percent)

*SOURCE: Based on Central Bureau of statistics data.

year2006 2007-2009

Sources

GDP 1.7 4.4 5.2 4.2 4.2

Business-sector product 2.5 6.3 6.6 5.4 5.3Civilian imports excluding diamonds, ships and aircraft -1.5 12.7 5.4 7.4 9.1

Uses

Private consumption 0.9 5.0 3.9 4.5 4.5

Public domestic consumption -1.0 -1.8 1.1 1.2 1.2

Fixed capital formation -4.5 -0.2 2.4 6.1 10.0

Exports excluding diamonds 7.9 19.3 7.8 6.6 7.6

Forecast2003 2004 2005