Bank of Israel Annual Report 2006

1. April 11 2007 Bank of Israel Annual Report2006

2. 2006 was an excellentyear for Israel's economy: • The economy grew rapidly for the third year in succession, with growth led by the business sector; • Employment increased, labor force participation rose, and unemployment went down; the real wage rose moderately. • The current account surplus increased to an unprecedented level, and capital inflows and outflows continued to increase; • The financial markets remained stable, with a rise in share prices, and with the continued trend of portfolio adjustment following the reforms of the last few years. • The economy made notable achievements in 2006, both on the real side and the financial side, remarkably so in light of the Second Lebanon War that took place in the summer.

3. 2006 was an excellentyear for Israel's economy:(continued) • Macroeconomic policy supported growth: • Fiscal policy was reflected by the relatively small public sector deficit (1.8 percent of GDP), and by a reduction of the public debt to 87.8 percent of GDP. • Public expenditure increased by 4.5 percent, and excluding interest, by 5.5 percent (civilian expenditure by 4.8 percent, and domestic defense expenditure by 7.5 percent). • In the first half of the year inflation was higher than the upper limit of the inflation target range, and in the last few months of the year was below its lower limit, under the effect of the courses followed by the exchange rate and fuel prices. • Monetary policy acted to return inflation to within the target range.

4. GDP Growth(1990-2006) 8.7 6.6 6.1 5.6 5.2 5.1 4.8 4.2 2.8 2.9 1.5 0.6- 0.9- • SOURCE: Based on Central Bureau of Statistics data.

5. Growth Rate of GDP & Business Sector Product(Quarterly, seasonally adjusted data, annual rates of change) % • SOURCE: Based on Central Bureau of Statistics data.

6. Labor Productivity and the TFP of the Business Sector(1995-2006) % * • GDP per hour worked (real percentage change on previous year). A factor input unit is weighted as 68 percent labor and 32 percent capital (real percentage change on previous year). Labor input includes foreign workers. • Source: Based on Central Bureau of Statistics data.

7. Per Capita GDP in Israel relative to the OECD, and to the U.S., 1991-2006(by PPP 2005) 69.51 94.1 91.5 65.78 87.2 87.3 64.71 62.9 Source: OECD Statistics and Central Bureau of Statistics data.

8. GDP per Employee, International Comparison, 2005(by PPP 2005, Israel=100) % Source: OECD Statistics and Central Bureau of Statistics data.

9. Participation Rate, International Comparison2005 % Source: OECD Statistics and Central Bureau of Statistics data.

10. Current Account of Balance of Payments(Percent of GDP, Annual, 1995-2006) % • SOURCE: Central Bureau of Statistics.

11. The Real Effective Exchange Rate by Trade Partners(01/1995-02/2007) % 119.8 • Decrease indicates appreciation. • Source: IFS. For last months of 2006 and beginning of 2007 – Bank of Israel processing.

12. The forces acting to increase current account surplus of balance of payments: • The depreciation in real effective exchange rate acted to moderate the rise in imports and boost the rise in exports. • Growth was led by exports which were supported by a boom in global demand. • Long-term forces increasing the national savings rate: the reduction in the social safety network which increases private savings; reduction in the cyclically-adjusted government deficit which is only partly offset by the reduction in private savings. • Long-term forces reducing investments as a share of GDP: reduction in the rate of population increase due to the slowdown in immigration; structural change that reduces the share of physical investment.

13. How Growth was Reflected in the Labor Market: • The economy's rapid growth increased the number of employees, reduced unemployment, and raised the real wage. • The rise in the wage was again accompanied by a rise in labor productivity in 2006, and a reduction in unit labor costs. • Unemployment among the highly educated declined and approached its natural level; this was reflected in a rise in wages of human-capital intensive industries. • Among those with low educational levels unemployment declined, 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.

14. Nominal Unit Labor Costs in the Business Sector in Israel, 3/1997-3/2006 (Quarterly data, seasonally adjusted) Product per labor hour Labor cost per hour Unit labor cost • SOURCE: Central Bureau of Statistics.

15. Rate of Employment, Rate of Unemployment, and Rate of Participation(Quarterly, 1997-2006) % 55.6 51.3 7.7 SOURCE: Based on Central Bureau of Statistics Labour Force Survey.

16. Rate of Unemployment by Education Level(annual data, 1995-2006) % SOURCE: Based on Central Bureau of Statistics Labor Force Survey.

17. Incidence of Poverty among Individuals – Various Measures (1997-2005) *Excluding Arabs of East Jerusalem. * The 2005/06 data are according to the decline in relative poverty including among Arabs of East Jerusalem. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

18. Incidence of Relative Poverty among Individuals, 1997 and 2005a By education of head of household By family size By population group By number of wage earners a Excluding Arabs of East Jerusalem. SOURCE: Central Bureau of Statistics Income and Expenditure Surveys.

19. Employment Rate and Average Wage per Employee Post by Population Group,a 2005 a Aged 65 or less. b There is a problem in identifying the ultra-orthodox in the Manpower and Incomes Surveys. They are identified here as families where the last educational establishment for at least one household member was a post-secondary school Talmudic college. SOURCE: Based on data from the Central Bureau of Statistics, Incomes and Manpower Surveys 2005.

20. The End