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I-biz Israel Update January 2010
I-biz Israel Update January 2010

Confidence is growing regarding the extent of the expected recovery of the Israeli economy during 2010 The Bank of Israel recently published revised 2010 forecasts: expected GDP growth is 3.5% (compared to 0.5% in 2009, and up from an earlier 2010 forecast of 2.5%) while unemployment is forecast to retreat to an annual average of 7.1%, compared to an estimated 7.7% in 2009.


Compared to the expected acceleration in the growth rate, the forecast reduction in the unemployment looks quite limited. But the labor market has the tendency to react more slowly than economic activity in a period of revival: this can be understood intuitively by stating that employers will not immediately increase their work force significantly in the early stages of a revival, so that unemployment will not recede significantly and might even go on increasing after economic activity has begun to improve (the revised Bank of Israel forecast of unemployment in 2010 7.1% - compares with an earlier forecast of 8.3%, which was higher than the 7.7% rate of 2009).


Another labor market indicator that expresses this slower or lagged reaction in a recovery is the level of wages. The graph shows that through October 2009, the average real wage was still in decline. Wage data in Israel are published with a considerable lag, but we venture to say that even after October, there was no increase in wages nor is any significant increase expected before mid-2010. There is an obvious link here with the still-high level of unemployment, which provides employers with a disincentive to increase wages, or excuse not to do so.


Will the ongoing weakness in wages have a dampening effect on consumption this year? Not if we are to believe Bank of Israel forecasts for 2010 which report a 4.8% increase in private consumption, following a 1.1% increase in 2009 and an earlier 2010 forecast no higher than this. Consumption is not only a function of current income/wages but also of wealth, and there is no doubt that capital market developments during 2009 increased the public's wealth considerably.


Nevertheless, an increase in wages, expected some time during 2010, will be further evidence that the Israeli economy has emerged successfully from the global crisis.


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